Transfer of a Going Concern and the Strict VAT Exemption Conditions

When a business or part of a business is sold as a going concern, the default VAT position can be switched off entirely. A qualifying transfer of a going concern, almost always shortened to TOGC, is treated as neither a supply of goods nor a supply of services, so no VAT is charged on the sale of the assets. This matters because business sales often involve large values, and charging 20 percent VAT only for the buyer to reclaim it later creates a needless cash-flow burden, stamp duty land tax inflation on property deals, and risk if the documentation is wrong. This guide is part of the UK VAT registration hub, which gathers the registration and structuring guides for growing businesses.

The relief is not automatic. It applies only where a set of strict conditions is satisfied, and the conditions are tested at the date of transfer. If any condition fails, the transfer is an ordinary taxable supply and VAT becomes due, frequently as an unwelcome surprise after completion. Related pieces in the same series explain how HMRC views artificial separation of businesses and how to reclaim pre-registration VAT on historical goods and services.

What a TOGC is, and why it matters

A TOGC is the sale of a business, or a distinct part of a business capable of separate operation, as a going concern. Where the conditions are met, VAT is simply not in scope on the transfer of the assets. The buyer does not pay VAT it would otherwise have to fund and then reclaim, the seller does not have to account for output VAT, and on property transactions the VAT-free treatment avoids inflating the stamp duty land tax base, because SDLT is charged on the VAT-inclusive consideration where VAT applies.

The relief reflects the principle that a business changing hands as a living concern is not really a consumption event to be taxed; it is a continuation of the same trade under new ownership. The conditions all exist to test that this is genuinely what is happening.

The core TOGC conditions

For standard assets (everything other than land and property, which has extra rules), all of the following must be satisfied at the time of transfer.

Same kind of business, no break in trading

Two conditions cause the most disputes: the same-kind-of-business requirement and the no-significant-break requirement. The buyer must intend to carry on the same kind of business. A restaurant sold to someone who will keep running a restaurant qualifies; the same restaurant sold to a developer who will gut the premises and build flats does not, because the business is not being continued. The buyer's genuine intention at the transfer date is what counts, and it is sensible to record that intention in the sale documentation.

The no-significant-break condition tests continuity. A short, normal closure, for example a few days to hand over keys, refit signage, or cover a bank holiday, will not break a TOGC. A long gap where the business simply stops trading, with staff dismissed and customers lost, can mean there is no going concern to transfer at all. The trade must be capable of continuing seamlessly under the new owner.

The transferee registration condition

The buyer must be VAT-registered, or liable or entitled to be registered, at the time of the transfer. The cleanest position is for the buyer to be registered before completion. Where the buyer is not yet registered but the transferred business will take it over the threshold, the buyer is registerable and the condition can still be met, but timing must be handled carefully so that registration is in place from the right date. A buyer that is neither registered nor registerable cannot benefit from TOGC treatment.

Timing pitfalls around registration

Registration timing is a frequent failure point. If the buyer applies late, or the effective date of registration falls after the transfer, the TOGC conditions may not be satisfied at the transfer date and VAT becomes due. On a high-value deal this is a serious consequence, so registration is usually arranged well ahead of completion, with the VAT number confirmed before the sale closes.

Property and the option to tax

Land and buildings carry extra TOGC conditions. Where the property being transferred is one on which the seller has opted to tax, or which is otherwise standard-rated (for example a new commercial building within its standard-rated period), the buyer must also opt to tax the property and notify HMRC of that option, and must do so by the relevant date, generally the date of the transfer. The buyer must also confirm that its option will not be disapplied by the anti-avoidance rules that can switch off an option in certain capital-goods-scheme scenarios.

Consequences of getting it wrong

If the parties treat a sale as a TOGC but a condition is not met, the transfer was actually a taxable supply. The seller should have charged VAT and accounted for it, and HMRC can assess the seller for the output tax, plus interest and potentially a penalty. The seller will then try to recover the VAT from the buyer under the contract, which is where the well-drafted VAT clause becomes vital. If the seller wrongly charged VAT on what was in fact a valid TOGC, the buyer cannot reclaim it as input tax, because no VAT was properly chargeable, leaving a cash hole until the position is corrected.

Records, warranties and the VAT clause

A sale agreement for a business should always contain a TOGC clause that allocates the VAT risk. Typically it states that the parties intend the sale to be a TOGC, sets out the buyer's warranties (registered, intends to continue the same business, has opted to tax where relevant), and provides that if HMRC later rules VAT is due, the buyer pays it on top of the price against a valid VAT invoice. The seller should also keep, or transfer, business records, since the buyer often needs them and the law deals specifically with the retention and handover of VAT records on a TOGC.

The pre-completion checklist

• Confirm the buyer is VAT-registered or registerable, with the effective date in place by completion.
• Confirm the buyer intends to carry on the same kind of business.
• Ensure there is no significant break in trading around the transfer.
• For property, confirm the buyer has opted to tax and notified HMRC by the transfer date where required.
• Check the buyer's option to tax will not be disapplied by anti-avoidance rules.
• Include a robust TOGC and VAT clause in the sale agreement.
• Agree how business records will be retained or handed over.

TOGC and the going concern itself

The phrase going concern is doing real work. The business must be a functioning, viable trade at the point of transfer, not a shell that has already wound down. Goodwill, customer contracts, work in progress, staff under TUPE, and the trading name moving with the assets all support the picture of a living business changing hands. The more the transfer looks like the continuation of an operating business, the more comfortably it sits within the relief.

Transferring only part of a business

TOGC treatment is not limited to the sale of a whole business. A distinct part of a larger business can transfer as a going concern in its own right, but only if that part is itself capable of separate operation as a business. A single branch with its own staff, customers and assets that the buyer will continue to run can qualify; a random selection of assets stripped out of a larger operation cannot, because there is no self-standing business to continue. Where part of a business is sold, the analysis focuses on whether the transferred part, considered alone, is a going concern that the buyer will carry on in the same kind of trade.

Key takeaways on TOGC

TOGC relief removes VAT from the sale of a business sold as a going concern, but only when every condition is satisfied at the transfer date: a genuine going concern, the same kind of business continued, no significant break in trading, a part capable of separate operation if only part is sold, and a buyer that is registered or registerable, with the additional option-to-tax steps for property. Because the conditions are strict and the downside of failure is VAT on the whole consideration, business sales of any size warrant a careful TOGC review and a properly drafted VAT clause, ideally with input from a specialist VAT accountant.