What is Transfer of Business Relief?
When the assets of a business, or part of a business capable of being continued by the person acquiring it is transferred from one person to another, there is deemed to be no supply for VAT purposes of the conditions for Transfer of Business relief are met.
This means that there is no VAT sale for the transfer. The relief is not optional so where the conditions are met, TOB will apply. Where the conditions are not met VAT may be chargeable on some, or all of the assets being transferred. Further details on Transfer of Business Relief are contained in a previous article included in Indirect Tax Matters, which can be found here.
VAT Recovery on TOB Transactions following the 2019 Finance Bill.
The 2019 Finance Bill deletes Section 59(2A) of the VAT Consolidation Act, which provided that where a business is transferred from one person to another, under Transfer of Business provisions, the transferor would only be entitled to VAT recovery on costs directly relating to the transfer of the business, if the transfer of the assets of the business would be subject to VAT, if not for TOB relief.
By way of example, if a tenanted residential property was sold to an accountable person and assuming the property had not been developed in the last 5 years, or been adapted for a materially altered use, then the sale of the property would be exempt but for transfer of business provisions. The transferor would not be entitled to VAT recovery on transactions costs incurred in relation to the sale on the basis that the sale of the property would be exempt but for TOB provisions. Using the same fact pattern above except for one variation, let's say that the property has been developed in the last 5 years and adapted for a materially altered use, then the sale of the property would now be VATable but for TOB, and the transferor would be entitled to VAT recovery on transactions costs incurred in relation to the sale.
Revenue have stated that the deleted provision has proven to be unnecessary as the entitlement to deduct is already provided for elsewhere in the VAT Act in Section 59(2). Section 59(2) sets out the general rules for overhead recovery, but does not specifically provide guidance on the recovery of costs incurred in respect of Transfer of Business Relief.
We must look to the ruling of the European Court of Justice in the Abbey National case (C- 408/98), which held that the VAT recovery of the transferor is not dependent on the VAT status of the related property or the use to which the transferee will put the related property to after the transfer of the business. Rather, the Court ruled that VAT recovery should be determined by reference to the transferor’s right of deduction in respect of its general overheads of the business which it just transferred. Therefore, VAT recovery on costs incurred directly relating to the transfer of the business will be based on the general overhead position of the business transferred.
To apply this analysis to our above example, if we have the sale of a tenanted property be VAT recovery, post the implementation of the 2019 Finance Bill, will not be based on whether the sale of the property would be subject to VAT but for the application of TOB. It will instead be based on the overall VAT recovery position of the transferors business, which may be a mix of VATable and exempt activities. VAT on costs incurred on the sale of a property subject to TOB Relief will now be restricted in line with the businesses general overhead recovery position.
The above is a high-level overview of VAT recovery on transaction costs when the assets of the business we transferred VAT recovery on such costs will now depend on the VAT status of the business, and not the status of he transferred asset.
To discuss the above in more detail please contact Christopher Connolly or Donal Kennedy.