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When must a VAT vendor account for VAT on a sale of its business as a going concern?
When must a VAT vendor account for VAT on a sale of its business as a going concern?
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Direct answer
A business sale may be zero-rated as a going concern only if every SARS condition is met when the agreement is concluded. Both seller and purchaser must be VAT-registered vendors. They must agree in writing that an enterprise, or a separable part capable of operation, is sold as a going concern and will be an income-earning activity on transfer, that all necessary assets pass, and that the consideration includes VAT at the zero rate.
If a condition is absent, do not assume the sale is zero-rated merely because the agreement uses the phrase "going concern".
What this means in practice
The transaction must transfer an actual income-earning enterprise or separable part of one. A building or isolated asset is not necessarily enough. SARS explains that the business activity must transfer with all assets necessary to conduct it. The buyer must be able to continue the activity at the transfer date.
Both parties need VAT registration before the agreement is concluded. The VAT wording also needs to be written into the agreement. That includes agreement that the enterprise is disposed of as a going concern, will be income earning on transfer, and that the consideration is inclusive of VAT at the zero rate.
Profitability is not the test. SARS says an enterprise need not be profitable at transfer, but the activities must be able to continue. SARS gives examples that are not income-earning going concerns, including a dormant business, a business that has not started, a bakery sold without its ovens and a sale and leaseback of a commercial building.
Step-by-step
- Identify the enterprise actually being transferred.
Describe the business or separable part, its income-earning activity and the assets it needs. This may include operational assets, records and other elements necessary to continue the activity. Do not start with a label. Start with what is actually capable of operating.
- Confirm VAT vendor status.
Check that both seller and purchaser are registered VAT vendors before the agreement is concluded. Keep the relevant registration details with the transaction file.
- Test whether the activity can continue at transfer.
Check that the activity will be income earning at the transfer date and that the assets necessary to carry it on pass to the purchaser. A partial sale can qualify only if it is a separable enterprise capable of separate operation.
- Check the written agreement.
The parties must agree in writing that the enterprise is supplied as a going concern, will be income earning at transfer and that consideration includes VAT at the zero rate. Ask a transaction adviser to check the agreement before relying on zero rating.
- Keep the VAT evidence together.
Retain the signed agreement, asset schedule, VAT registration details, activity records and zero-rated tax invoice. These documents should tell the same story about what transferred and why it was treated as a going concern.
Documents and records to keep
- Signed sale agreement with the required going-concern, income-earning and zero-rate wording.
- Seller and purchaser VAT registration details.
- Asset schedule and records showing necessary assets passed.
- Evidence of the income-earning activity at transfer.
- Zero-rated tax invoice.
- Turnover, management or operational records supporting that an enterprise was carried on.
Important limits and exceptions
All the conditions must be met. The label in the agreement cannot cure a transaction in which the buyer does not receive an enterprise capable of continuing, the necessary assets do not pass or the required written agreements are missing.
This guide does not advise on income tax, capital gains tax, transfer duty, valuation, legal warranties or the wording needed for every commercial risk. A sale of property, a partially operating business, a business with missing assets or an agreement signed before VAT registration are high-risk facts that need specialist review.
Do not infer that a profitable business automatically qualifies or that an unprofitable one automatically fails. The relevant test is the transfer of an income-earning activity that can continue.
When to get tailored advice
Get tailored VAT and legal advice before signing or invoicing a business sale, particularly for property, a partial business sale, a newly registered purchaser, a dormant operation or an asset-light business.
TaxProof can help assemble the VAT registration, agreement and asset records for review. It cannot decide that a sale is zero-rated or draft the transaction terms without a full analysis of the enterprise and agreement.
Related TaxProof guides
- VAT registration and VAT201 guide
- Can a VAT vendor use a simplified tax invoice for a small transaction? (B02-BUS-004)