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VAT when acquiring premises

02 March 2006
VAT when acquiring premises

The problem
Gordon, a chef, wants to open his own restaurant. He has a number of supporters from whom he has secured funding, and the big issue now is to find a suitable location. Starting at a new site has its attractions but is costly, so Gordon decides to find a site where a restaurant has already built a reputation. But the restaurant is in receivership and Gordon is worried this could have implications.

The law
Buying a closed restaurant from a receiver or even the original owner is relatively straightforward as long as some simple rules are followed. One of the main areas that must be considered is VAT.

If the restaurant has been closed for a while, it may seem to you that you're not buying it as a "going concern". However, this may not be the case for VAT purposes. How the purchase is viewed by HM Revenue & Customs (HMRC) will affect how much VAT you pay and from when you register for VAT.

Expert Advice
It's essential to establish before you purchase the business what the VAT treatment of the restaurant will be. Will it be treated as a going concern by the HMRC? You would obviously not want the HMRC to come along afterwards and dispute the VAT treatment. Once diners have eaten, there's no way you will collect the VAT from them, so any amounts that the HMRC successfully claims from you that you didn't originally charge will hit your bottom line.

A recent case involved a new restaurant operator who bought the assets of a former restaurant from an executor and acquired a lease on the same site from the freeholder.

The old restaurant had been closed for some months and most of the assets that the new operator would have liked had been sold, and so he bought new ones. HMRC said there had been a transfer of the old business as a going concern so the new restaurant was VAT-registerable from a much earlier date than the new operator had expected.

The case went to tribunal and HMRC lost. The tribunal decided the business hadn't been sold as a going concern, but was the sale of a package of assets. The package sold didn't include the ability to carry on trading. This ability was dependent first on the new owner's agreement with the landlord, and second on replacing all the equipment that had been removed.

The goodwill was obtained by the new operator in consequence of the new lease and not the sale. Because it wasn't a going concern, the owner didn't have to register until he breached the VAT limit, which is currently £60,000 and includes cumulative turnover.

Check List

  • Having found a restaurant or site, make sure you produce budgets and forecasts for at least the first year of trading. The budgets should include a cash-flow and should show how VAT affects the proposed venture.
  • Check with your professional advisers whether you would benefit from the purchase being a "transfer of a going concern" (TOGC).
  • If you want it to be a transfer as a going concern, make certain the contract has as many of the key points as possible, such as goodwill, no significant break in the business, the same lease, same staff, purchase of equipment and other assets, and perhaps even the name.
  • If you don't want it to be a going concern, you need as few of the aspects mentioned for a TOGC as possible. For this to be possible, a break in the business would be desirable, as would acquiring an interest in the property from someone other than the former operator.
  • Having established the best position, consider with your advisers whether to seek confirmation from HMRC, although that can sometimes prove difficult to obtain, and ensure you monitor when you need to be registered for VAT.

Beware!
The sale of businesses is an area that provides rich pickings for HMRC, particularly where bars and restaurants are concerned, because they often close then reopen after a short while.

The closure and reopening of businesses in this way is one of the key subjective areas deciding whether a business or a collection of assets has been sold.

Contacts

Adrian Houstoun VAT partner, Kingston Smith Tel: 020 7566 4000
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