Do you charge VAT when selling a business? Key rules explained

When buying or selling a business in the UK, VAT (Value Added Tax) is a critical consideration. Getting the VAT treatment wrong can lead to costly mistakes, penalties, and disputes with HMRC. So, do you charge VAT when selling a business? The answer depends on how the transaction is structured. 

Buying or selling a business: VAT basics 

There are two common ways to transfer a business: 

1. Sale of shares in a limited company 

2. Sale of business assets 

Each option has different VAT implications and risks. Let’s explore both. 

Is VAT charged on the sale of shares? 

If you’re selling shares in an existing company, the transaction is exempt from VAT under the financial services exemption. This means: 

• The seller does not charge VAT on the sale. 

• The buyer should ensure the purchase agreement includes a clause requiring the seller to issue a tax invoice if HMRC later rules the transaction was not exempt. 

Impact on VAT recovery for professional fees 

Because the sale of shares is an exempt supply, the seller’s ability to reclaim VAT on professional fees (such as legal or advisory costs) is restricted: 

• Individuals selling shares cannot recover VAT on related costs. 

• Companies (e.g., holding companies) may recover VAT under partial exemption rules, but only if the costs relate to an economic business activity. 

Hotel La Tour Case: why VAT recovery was denied 

The Hotel La Tour case highlighted the complexity of VAT recovery.  Hotel La Tour hoped to reclaim VAT on professional fees incurred in connection with the sale of shares in a subsidiary company despite VAT on costs associated with making an exempt supply being exempt input tax and in principle not recoverable.

Hotel La Tour was initially successful at the First Tier Tribunal and then at the Upper Tribunal as they argued that the purpose of the exempt share sale was to raise funds for business activities which were taxable.

HMRC disagreed that the VAT was recoverable and appealed to the Court of Appeal which reversed the ruling finding that the costs related directly to the sale of shares.

Hotel La Tour then took their appeal to the Supreme Court, which agreed with the Court of Appeal’s findings in a unanimous decision. Hotel La Tour were, therefore, denied the recovery of VAT on professional fees relating to the sale of shares.

The sale of shares in a company requires careful planning to ensure that neither the buyer nor seller is disadvantaged from a VAT perspective.

The case of the Hotel La Tour highlights how selling shares requires careful planning to avoid unexpected VAT issues. 

Is VAT charged on the sale of business assets? 

Selling business assets is usually subject to VAT at the standard rate. However, if the business is sold as a Transfer of a Going Concern (TOGC), the transaction is outside the scope of VAT. This means no VAT is charged. 

What is a TOGC? 

A TOGC applies when all or part of a business is sold to a buyer who intends to continue the same trade. To qualify: 

• The buyer must use the assets to carry on the same kind of business. 

• The buyer must be VAT-registered (or become registered as a result of the purchase). 

• The business must be operational at the time of transfer. 

Additional conditions apply when land or property is involved, especially if the seller has opted to tax. 

TOGC treatment is not optional. If VAT is incorrectly charged, HMRC can deny the buyer’s VAT recovery. 

Why Expert VAT Advice Matters 

VAT on business sales is complex. Missteps can lead to financial loss and compliance issues. Whether you’re selling shares or assets, professional advice is essential. 

At Shorts, our specialist VAT advisory team has extensive experience in business transfers, both in the UK and internationally. We can help you navigate the rules and ensure your transaction is structured correctly.