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Land and buildings: VAT implications when selling your farm business

By: Liz Hill Date: 2 October 2015
Category: VAT,Article

In October's Anglia Farmer's article, Liz Hill writes about the VAT implications of selling your farm business.

Under the VAT rules covering the “transfer of a business as a going concern” (“TOGC”), the sale can be VAT free if certain conditions are met. Being VAT free means the buyer does not have to pay over an extra 20% in cash, plus if a property is involved, there is no extra stamp duty land tax (the tax charged on the property cost including VAT – the ultimate in “tax on tax”).

In our last article, the VAT implications were considered on the disposal of a farm business, whether wholly or partially, but there are some additional issues to consider when a TOGC involves land or buildings which are subject to VAT;

Condition 1
The buyer must have declared an Option to Tax to HMRC (a formal declaration advising that VAT will be charged on any use made of the land/buildings eg rent or sale). The Option to Tax should be made to HMRC on or prior to the transfer date.

Condition 2
The buyer must also notify you that the Option to Tax will not be cancelled. To do this, the buyer must be sure that the following scenarios do not apply, namely that:
  • the land/buildings transferred to you will become a capital item within the capital goods scheme (ie costs over £250,000); and
  • the use of the land/buildings will be exempt from VAT.

If these scenarios apply, then the Option to Tax may be cancelled and the TOGC may not apply.

If you are transferring land/buildings on which there is no Option to Tax, then the buyer is not required to declare an Option to Tax.

And finally…

As the seller you are responsible for applying the correct VAT treatment and HMRC may require you to provide evidence of the VAT treatment. If the transaction is to be treated as a TOGC, it is advisable for you to;
  • Ask the buyer for evidence that his Option to Tax is in place by the relevant date eg get a copy of the notification letter from HMRC
  • Ask the buyer for written confirmation that his Option to Tax will not be cancelled under the above scenarios, and
  • Ensure the contract allows for both parties to support TOGC treatment, including what happens should HMRC determine that the transfer is not a TOGC (normally the seller issues a VAT invoice to the buyer).

If HMRC decide that the deal is not a VAT free TOGC (there is usually a four year window for them to make such a determination) not only will they require the VAT to be paid, but they could impose a penalty and interest. Such issues need to be addressed in the contract.

The rules surrounding TOGC’s are complex and the best advice is to get the best advice prior to the transfer! Getting it wrong during or even worse at the end of the disposal process can delay the sale unduly and potentially have the effect of adding to the total cost of the deal and result in additional professional fees.

For more information on this please contact Liz Hill or Rob Geary in our VAT team.
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