Should you retain a vat number?

When someone buys a business, they have the option of retaining the VAT number. But what are the pros and cons of doing so? Kenny Logan from our Edinburgh Office looks at the implications.

If someone buys the trade and assets of a VAT-registered business, it can be treated as ‘transfer of a going concern’ (TOGC) for VAT purposes. This avoids charging VAT on the sale of the business.
When someone buys a business as a TOGC, they also have the option of taking over the VAT number of the original owners. This can be done by completing a VAT68 form and submitting it to HMRC with the VAT 1 application for VAT registration. The previous owner must not submit a VAT 7 application for de-registration. Once the transfer of the registration has been allowed by HMRC, it cannot be revoked.

Changing the status of someone’s business, for example from sole proprietor to a limited company or partnership is treated as a TOGC for VAT registration purposes. This means that the person can, if they wish, apply to retain the existing VAT registration number of their old business.

Advantages of retaining VAT number

Advantages to retaining the existing VAT number are:
• Existing invoices and stationery can be retained.
• Administration during the changeover period is simplified.
• VAT return periods remain unaltered.
• There is no disruption for supplies and customers checking the validity of a new VAT number.

Disadvantages of retaining VAT number

However, there are some potential disadvantages to retaining the VAT number when someone purchases a business.

Retaining the vendor’s VAT number can create a potential problem because, in doing so, a business takes on all the VAT liabilities of the existing registration and could be caught out by an assessment for mistakes made by the vendor. The procedure is, therefore, only suitable when the two parties are closely connected, or when someone is just changing the entity of the business.

A right to reclaim overpaid VAT belongs only to the person who overpaid it.

Business records

The business records remain with the vendor, but they must make them available to the purchaser so that they can complete their VAT returns. HMRC can direct the vendor to pass the records over to the purchaser, if requested to do so.
Any special scheme, such as the flat rate scheme, annual accounting, or a retail scheme which is used by the vendor, ceases at the date of the transfer and the purchaser has to reapply to use them.
The previous owner must cancel any direct debit they have set up to pay their online VAT returns, and the new owner must set up new direct debit instructions.

IN SUMMARY

If someone buys a business or changes the legal entity, they can retain the existing VAT number. This simplifies both admin and their relationship with suppliers and customers, but they are liable for any errors made by the previous owners.

Do contact us for any further questions you may have.