Transfer of a Going Concern (TOGC): VAT-Free Business Sales

Blog Article

In the UK, selling a business can involve complicated legal and tax considerations, one of the most critical being Value Added Tax (VAT). In many cases, when assets are sold, VAT must be charged. However, a specific relief exists when an entire business — or a part of it that is capable of independent operation — is sold. This is called the "Transfer of a Going Concern" (TOGC). Understanding how TOGC works can save significant amounts in VAT, streamline transactions, and prevent cashflow issues. In this article, we will explore the TOGC rules, eligibility conditions, practical steps, and the crucial role a value added tax consultant plays in ensuring compliance.

What is a Transfer of a Going Concern (TOGC)?

A Transfer of a Going Concern (TOGC) occurs when a business or part of a business is sold and continues to operate without significant interruption. Under normal circumstances, the sale of business assets would be subject to VAT. However, when a TOGC applies, the transaction is treated as outside the scope of VAT — meaning no VAT is charged on the sale.

For sellers and buyers alike, avoiding VAT on a multi-million-pound transaction can be highly beneficial. However, the process must meet strict HMRC conditions, and errors can be costly. That is why early advice from a value added tax consultant is vital to navigate these complex requirements properly.

Why is TOGC Important?

VAT is normally charged at 20% on taxable supplies of goods and services in the UK. Without TOGC relief, a business sale could trigger significant VAT charges, which the buyer must pay upfront — and then later reclaim if they are VAT-registered. Not only does this create a cash flow burden, but it also introduces the risk of HMRC disputes if the reclaim is challenged.

By correctly structuring the transaction as a TOGC, both parties benefit:

No immediate VAT liability on the transaction.

No cash flow burden for the buyer.

Streamlined business continuity without administrative VAT reclaim delays.

Reduced risk of VAT errors and penalties.

However, not all business sales qualify as a TOGC. It is therefore essential to understand the specific conditions.

Conditions for TOGC Qualification

HMRC provides detailed guidance on the conditions necessary for a transaction to be treated as a TOGC:

The assets must constitute a business: It must be a "going concern" — meaning it must be operating and capable of continuing as a business.

The buyer must intend to use the assets to carry on the same type of business: There must be an intention for the business to continue.

The buyer must be VAT registered (or must register immediately).

If the seller is a landlord of the business premises, and the lease is included in the sale, the buyer must also opt to tax the property if the seller has done so.

No significant break in the business's operations: The business must continue without major interruptions between the transfer and resumption under the new owner.

The consideration must not be treated as a supply of assets that are normally exempt unless conditions for opting to tax have been correctly applied.

If any of these conditions are not satisfied, VAT will apply, even if the parties intended otherwise.

Examples of TOGC Transactions

Example 1: Retail Shop Sale
A sole trader operates a clothing boutique and sells it to another trader, including the shop lease, stock, brand name, and goodwill. The buyer immediately continues operating the shop. Provided the buyer is VAT-registered, and all other conditions are met, this would be a TOGC — and no VAT is chargeable.

Example 2: Business Unit Carve-Out
A company sells one division of its business that operates independently (with its own staff, premises, and customers) to another company. As the division can operate on its own and continues trading, the sale qualifies as a TOGC.

In both cases, professional advice from a value added tax consultant ensures all conditions are met and documented correctly.

Practical Steps for Sellers and Buyers

Both sellers and buyers must take proactive steps to ensure a TOGC is achieved:

For Sellers:

Check eligibility early: Review whether the transaction meets HMRC conditions for TOGC.

Inform the buyer: Provide clear information regarding VAT status, any opt to tax elections, and business operations.

Continue business operations: Ensure that business activities continue right up to completion.

For Buyers:

VAT registration: Ensure you are VAT registered at the time of transfer.

Consider property elections: If premises are included and subject to an option to tax, mirror the seller’s position by opting to tax.

Due diligence: Conduct thorough due diligence to ensure all business assets, contracts, and customer relationships are transferred seamlessly.

Given the risks and complexity involved, it is highly recommended to involve a value added tax consultant from the earliest stages of negotiations.

Common Pitfalls to Avoid

Mistakes in TOGC transactions can have serious consequences, including retrospective VAT liabilities, interest, and penalties. Some common pitfalls include:

Incorrectly assuming TOGC applies when in fact it does not.

Failure to maintain continuity of business operations.

Buyer not registered for VAT at the time of transfer.

Not correctly handling the option to tax on properties.

Not documenting the buyer's intention to continue the same type of business.

If HMRC later decides the transaction did not qualify as a TOGC, the seller may be required to pay VAT, even if it was not collected from the buyer at the time.

The Role of a Value Added Tax Consultant

Given the high stakes involved, seeking specialist advice is not optional — it is critical. A value added tax consultant will:

Review transaction documents to ensure VAT compliance.

Advise on eligibility for TOGC relief.

Help with VAT registrations and elections to opt to tax.

Draft contractual clauses to protect both parties.

Liaise with HMRC if advance clearance or confirmation is needed.

Their expertise can not only avoid costly errors but can also structure deals in a way that is most tax-efficient for all parties involved.

The Transfer of a Going Concern is a valuable VAT relief mechanism that can greatly facilitate business sales and acquisitions in the UK. However, the rules are complex, and even small errors can have substantial financial repercussions. Early and expert advice is crucial to ensure that all HMRC conditions are met, transactions are properly documented, and the transition is as smooth and cost-effective as possible.

Whether you are a buyer or a seller, engaging a qualified value added tax consultant is one of the most important steps you can take when planning a business transfer. Their insights can make the difference between a seamless, VAT-free transaction and an expensive, contested deal.

TRANSFER OF A GOING CONCERN (TOGC): VAT-FREE BUSINESS SALES

Transfer of a Going Concern (TOGC): VAT-Free Business Sales