VAT – exiting the business

TaxTalk - September 2022

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Selling up and leaving all your troubles behind for someone else is not always possible. Particularly when it comes to VAT.  Here’s what to look out for.

Nowadays, many businesses have little (if anything) in writing from HMRC to confirm the VAT treatment of their transactions is correct. This means the tax adviser reviewing the business as part of the transaction’s due diligence often identifies potential VAT errors.  If these are detected by HMRC, they could lead to a retrospective VAT demand plus interest and/or penalties.

If a potential VAT exposure is identified, it may cause problems (depending on the amount involved) for the seller that may include one or more of the following:

  • a reduction in sale proceeds
  • tax liability insurance having to be taken out
  • monies being held in escrow for a period
  • having to obtain written HMRC rulings
  • having to correct errors and notify HMRC
  • having to correct VAT record-keeping deficiencies, (eg obtaining and retaining evidence that goods sold have been exported outside the UK, obtaining VAT invoices from suppliers)

Sometimes the VAT issue is so significant that the sale of the business is delayed or even stopped altogether. A typical example is a business that is not VAT registered because it considers that it only makes VAT-exempt supplies. But the due diligence then finds the business should have registered for (and accounted to HMRC for) VAT from a date several years ago for either of the following reasons:

  • Purchasing services from non-UK suppliers where those services would have been subject to VAT had they been provided by UK suppliers
  • Recharging costs between group companies where HMRC might argue that VAT-able supplies have been made by one group company (eg the holding company) to another (eg the one making VAT-exempt supplies that cannot recover any VAT on its costs under VAT law).

Bearing all this in mind, if you are considering selling up and/or engaging with a new investor or lender in the near future, we recommend you undergo a practice-run VAT due diligence exercise right away. Then, if any VAT issues are identified, you can correct them now before they potentially derail or delay a future sale of, or investment in, your business.

If you would like further advice on VAT in these circumstances, please contact Mark Ellis or your usual PKF contact.