I always vowed not to do too much technical stuff in these blogs, but sometimes things happen, especially in tax, that are worth talking about.

Most people reading this are business owners, so probably have a passing interest in what the government forcibly extracts from their wallets.

Here’s a funny that cropped up over the past couple of weeks.

One of my clients had the chance to buy the factory premises from where his business operates. His company is one of several tenants.

Terms were agreed with the current owner, my client had a chunky deposit held in a personal bank account and the bank had therefore offered the required mortgage.

The agreed sale price was about £1.5m.

The current owner was VAT registered, had opted to tax (don’t ask) and therefore VAT of £300,000 would be charged on the sale.

As is sometimes the way in our world, all this came to my attention purely as a passing comment during a meeting with my client. It’s a simple property sale between two people well-known to each other. How can that go wrong?

If I had a pound for every time I’ve had to tell a client that tax planning is called that for a reason…..

I identified one or two issues:

  • The company the client had set up to buy the factory had not been VAT registered so how did he suppose the £300,000 would be reclaimed?
  • The bank had agreed to lend the balance of £1.5m after the deposit provided by my client. So where was the £300,000 VAT payment coming from? Even if it is reclaimable, it still has to be paid to the seller and there could be a 3-month delay from payment to refund by HMRC.
  • This is an old favourite – notwithstanding VAT on the purchase of a commercial property may be reclaimable, did you know that Stamp Duty Land Tax is payable on the VAT bit as well? In my client’s case, that would have added a further £15,000 onto an already outrageous SDLT bill.

Most accountants in practice will probably tell you that VAT is the most complicated of all our many taxes, and VAT in property transactions is the most complicated part of a complicated tax.

NEVER pile in and undertake sales or purchases of commercial property without taking advice first. That means in advance. Plan, in other words.

So, what should my client have done? Luckily, it wasn’t too late in this case.

He wasn’t just buying a lump of bricks and mortar. He was effectively buying a rental business. The place was fully let (albeit he was by far the biggest tenant).

Because the situation after the sale would be exactly the same as before, except that my client would be paying rent to another company owned by him instead of a 3rd party, this qualified as a transfer of a going concern (TOGC) for VAT purposes.

A TOGC does NOT result in a VAT charge on the sale. No VAT = no additional funding requirement + no additional SDLT charge = problem solved.

There were a few hoops to jump through to make sure it all worked, but work it did and everyone is happy. Everyone except the people at the SDLT office, obviously.

Oh, and he owed the trading company a fair sum so we channelled the deposit money into that company, thus clearing that overdrawn director’s loan account and saving a fair amount of personal and company tax. As an entirely separate exercise, the trading company then lent the buying company the deposit money. All perfectly acceptable.

The moral of this little story is not to demonstrate how clever I am – it’s what I get paid for, after all.

It’s to remind you that tax planning is a vital part of any well-run business so don’t ignore it.

And if you’re scared of picking up the phone to discuss this stuff with your accountant because he’ll charge you for a chat – change the accountant.

Chris Martin

Chris Martin is a chartered accountant and business advisor and has been helping franchisees create and grow wonderful businesses for over 20 years. He is a published author and has written extensively on franchisee tax issues. He passionately believes that whilst franchising is a deservedly successful business format, franchisees are often let down by their franchisors’ failure to offer support and guidance regarding the financial side of running the business. This leaves franchisees frustrated, overwhelmed and unable to grow their businesses to the extent they should. Chris has developed simple systems, support and guidance to ensure franchisees create businesses that provide them and their families the lives they so richly deserve.

Chris Martin is a chartered accountant and business advisor and has been helping franchisees create and grow wonderful businesses for over 20 years. He is a published author and has written extensively on franchisee tax issues. He passionately believes that whilst franchising is a deservedly successful business format, franchisees are often let down by their franchisors’ failure to offer support and guidance regarding the financial side of running the business. This leaves franchisees frustrated, overwhelmed and unable to grow their businesses to the extent they should. Chris has developed simple systems, support and guidance to ensure franchisees create businesses that provide them and their families the lives they so richly deserve.