What is TOGC?

Transfer of a Going Concern (TOGC) refers to the sale of a business or part of a business that meets specific criteria, allowing it to be classified as a TOGC rather than merely a transfer of assets. In this scenario, the transaction is treated as 'out of scope' for VAT, meaning no output VAT is charged. This can significantly impact financial outcomes.

Key Purposes of TOGC

The primary objectives of TOGC include:

• Relieving the Buyer of VAT Costs:By classifying the transaction as a TOGC, buyers are relieved from VAT on the purchase. This enhances cash flow and simplifies asset valuation.
• Protecting Government Revenue:TOGC helps safeguard government tax revenues by eliminating unnecessary tax liabilities and ensuring proper management of input tax claims.

Conditions for TOGC Qualification

To qualify as a TOGC, several conditions must be met:

• Business Transfer: The assets must be sold as part of a business that is considered a going concern. It doesn’t have to be profitable, but it should meet the accounting definition of a going concern.
• Intended Use by Buyer: The buyer must intend to use the assets to continue the same type of business as the seller. A shift in business type is acceptable; however, a complete transition to an unrelated industry would not qualify.
• Taxable Person Status: If the seller is VAT-registered, the buyer must also be a taxable person or must become one as a result of the transfer.
• Operational Independence: If only part of the business is sold, that segment must be capable of operating independently.
• Continuity of Business: There should be a reasonable continuation of the business without a series of immediate transfers.

Indicators Supporting TOGC Classification

While not exhaustive, the following indicators can support a business being classified as a TOGC:

• Mutual Agreement: Both the seller and buyer should agree to treat the sale as a TOGC, ideally documented in the sales agreement.
• Stock Transfer: A significant transfer of stock typically indicates a TOGC. If stock is sold separately, VAT may apply.
• Equipment Transfer: Transferring essential equipment necessary for operations suggests a TOGC, although it can still qualify if the buyer already owns similar equipment.
• Goodwill Presence: Goodwill, which represents the difference between the total value of a business and its individual asset values, can be demonstrated through customer relationships, location, and brand recognition.
• Business Name Transfer: The sale of the business name often indicates goodwill and suggests a complete business transfer.
• Premises Transfer: The transfer of the physical location can be crucial, depending on the nature of the business.
• Employee Contracts: If the new owner takes over existing employee contracts, this supports TOGC classification.
• Customer Lists: Selling customer lists or transferring supplier contracts can indicate the intention to continue the seller's business operations.

Risks of Misclassification

Misclassifying a transaction as a TOGC can lead to retroactive VAT application, which may create financial liabilities. Therefore, all parties involved must carefully evaluate the implications of any potential errors in contractual agreements.