VAT for a new business

luciano

Hello,

I would like to verify a very strange opinion I came across recently. Three people (A,B and C) buy a lease for a commercial property (restaurant). Person A has already own business and is a VAT payer. Person B and C establish a partnership and trade together in the property.

According to what I've heard the new business (B&C partnership) will have to pay VAT from the first day because on of the lease buyers - A pays VAT already.

I don't know how to verify this statement but it doesn't sound logical to me. How an independent business can be a subject to VAT straight from the beginning because a person not associated with the company is a VAT payer?

chrismac1

There are various ways, here are two you can look up on the HMRC site for more details:

1. Option to tax - rent is not normally standard rated. But it is if an owner opts to tax it, which pub / restaurant chains commonly do. (I think it's short-sighted and nuts, that's another matter.) It is then taxed in perpetuity unless someone else manages to crawl over broken glass with HMRC to get it untaxed.

2. If a VAT-registered person or entity sells a business, the transaction itself typically has no VAT on it. This is a transfer of a going concern - TOGC. One of the conditions for no VAT to be payable on the sale of the business property under TOGC is that the puchaser registers for VAT immediately. If you are doing this, get a new VAT number so you escape any VAT problems the vendor may have, which is more common than not at this stage in the business cycle.

System

chrismac1 wrote: »

There are various ways, here are two you can look up on the HMRC site for more details:

1. Option to tax - rent is not normally standard rated. But it is if an owner opts to tax it, which pub / restaurant chains commonly do. (I think it's short-sighted and nuts, that's another matter.) It is then taxed in perpetuity unless someone else manages to crawl over broken glass with HMRC to get it untaxed.

2. If a VAT-registered person or entity sells a business, the transaction itself typically has no VAT on it. This is a transfer of a going concern - TOGC. One of the conditions for no VAT to be payable on the sale of the business property under TOGC is that the puchaser registers for VAT immediately. If you are doing this, get a new VAT number so you escape any VAT problems the vendor may have, which is more common than not at this stage in the business cycle.

I don't know what question you answered but it wasn't the OP's.

heretolearn_2

Hi OP,

What do you mean by A is a VAT payer? We are all of us VAT payers, it isn't optional. I think this is the source of your confusion.

What A presumably is, is VAT registered, so he not only pays VAT (which we all do even as consumers) but also charges VAT. B and C are not VAT registered so they still have to pay VAT but are not allowed to charge it.

If the landlord is VAT registered then they will charge VAT on the rent, the VAT registration status of the leasers makes no difference to that (OK there are some exception notably charities that have an exemption from paying VAT on rent, but that doesn't apply here). The only reason VAT would not be payable on the rent would be if the landlord is not VAT registered (not likely).

Take a look at your next supermarket receipt. You are paying plenty of VAT but you are not VAT registered. It doesn't depend on that.
Same for businesses. They still have to pay VAT no matter what their VAT registration status.

chrismac1

As I understood the question, it is how a brand new business - or one which is not yet registered - can come to be taxable for VAT from day 1 by virtue of the fact it has bought an existing business or leased some premises.

If that was not what the OP meant then I agree I didn't answer the question.

chrismac1

Clients who buy restaurants and pubs often beleive they'll have £77k of takings before they must hand over VAT. If it's a TOGC, they are usually saddened to learn it's one-sixth of takings from day 1.

luciano

heretolearn wrote: »

Hi OP,

What do you mean by A is a VAT payer? We are all of us VAT payers, it isn't optional. I think this is the source of your confusion.

What A presumably is, is VAT registered, so he not only pays VAT (which we all do even as consumers) but also charges VAT. B and C are not VAT registered so they still have to pay VAT but are not allowed to charge it.

If the landlord is VAT registered then they will charge VAT on the rent, the VAT registration status of the leasers makes no difference to that (OK there are some exception notably charities that have an exemption from paying VAT on rent, but that doesn't apply here). The only reason VAT would not be payable on the rent would be if the landlord is not VAT registered (not likely).

Take a look at your next supermarket receipt. You are paying plenty of VAT but you are not VAT registered. It doesn't depend on that.
Same for businesses. They still have to pay VAT no matter what their VAT registration status.

Thank you for correcting me. I meant VAT registered. My accountant claims that if A is VAT registered and he is one of the buyers then the new business has to register for VAT. It sounds crazy to me.

chrismac1

He is correct I beleive. If it is a TOGC the good news is you won't be paying 20% VAT on the purchase consideration

JasonLVC

luciano wrote: »

Thank you for correcting me. I meant VAT registered. My accountant claims that if A is VAT registered and he is one of the buyers then the new business has to register for VAT. It sounds crazy to me.

I think I'm with chrismac1 on this one, but there is very little detail to really give specific advice (and if you've already asked your accountant and don't understand it then I'd suggest going back to your accountant and ask them to explain it again).

The purchase of a lease on its own does not make this a ToGC. For a ToGC to apply there needs to be a "business" being sold which is then carried on in the same manner.

So if the vendor runs the restaurant and sells it as a restaurant then it is a ToGC. However, if the vendor is just a landlord and rents to a tenant, then if he sells the property to someone who will occupy it as a restaurant this is not a ToGC (not same business as goes from rental business to restaurant) but if the purchaser interds to rent to a tenant then it is a ToGC again.

It sounds like, filling in the blanks, that the intention is for B&C to buy the lease with help frrom A and B&C occupy the property as a restaurant....but if you're buying a lease only, it suggests there is no "restaurant business" here, just a lease for a property with a restaurant in it, so no ToGC.

So you need to give a bit more detail here :

What is the status of the vendor. Is he a restaurant or a rental business? Is he VAT registered?

If persons A, B and C jointly own the property that is fine from a funding view, but if persons B&C only occupy the property what is person A doing, is he just the cash/stake in the property or will he be charging a rent to B&C?

HMRC are hot on the sale of restaurants and properties - two areas for evasion and error, I've seen it loads where a restaurant owner engineers a sale to avoid a ToGC so that the buyer can avoid registration (ie, every few months the business is 'sold' when it reaches VAT registration threshold, new owner starts again from Nil turnover, never VAT registered and so cheaper than competitors who are VAT registered) - not suggesting this is your plan, just that you have to get this absolutely correct to avoid unwanted attention in the future and potential big penalties.