The Pros and Cons of Retaining the VAT Number When Buying a Business

When acquiring a business, one of the crucial decisions you’ll face is whether to retain the existing VAT number or apply for a new one. This decision can have significant implications for your business operations, tax liabilities, and administrative processes. In this post, we’ll explore the benefits and potential drawbacks of retaining the VAT number when buying a business and provide some practical advice to help you make the best choice for your situation.

Understanding the Transfer of a Going Concern (TOGC)

When you purchase the trade and assets of a VAT-registered business, the transaction can often be treated as a Transfer of a Going Concern (TOGC) for VAT purposes. This designation means that the sale is not subject to VAT. Which can be advantageous for both the buyer and the seller. As part of a TOGC, the buyer has the option to take over the VAT number of the existing business. Rather than registering for a new one.

How to Transfer the VAT Number

To retain the VAT number of the business you’re acquiring, you must complete and submit a form VAT 68 to HMRC along with a VAT 1 application for VAT registration. Importantly, the previous owner must not submit a VAT 7 application for de-registration, as this would cancel the existing VAT number. Once HMRC approves the transfer, it cannot be reversed, so it’s essential to consider the decision carefully.

Advantages of Retaining the VAT Number

There are several benefits to retaining the existing VAT number when you buy a business:

1. Continuity of Invoices and Stationery: By keeping the same VAT number, you can continue to use existing invoices, stationery, and other business documents without the need for costly reprints or updates. This also ensures that your branding remains consistent.
2. Simplified Administration: Retaining the VAT number can simplify the administrative process during the transition period. You won’t need to inform suppliers and customers of a new VAT number. Reducing the risk of confusion and ensuring a smoother handover.
3. Unchanged VAT Return Periods: If you keep the same VAT number, your VAT return periods will remain the same. Which can be beneficial for maintaining consistent cash flow and financial planning.
4. Customer and Supplier Confidence: For businesses that rely heavily on relationships with suppliers and customers. Retaining the VAT number can prevent any disruption or doubt about the validity of your VAT status. This continuity can be crucial for maintaining trust and avoiding any interruptions in business operations.

Disadvantages of Retaining the VAT Number

While there are clear benefits, there are also some potential downsides to retaining the VAT number when buying a business:

1. Inherited VAT Liabilities: One of the most significant risks is that by taking over the existing VAT number, you also take on all the VAT liabilities associated with that registration. This means you could be held responsible for any unpaid VAT, errors, or disputes that arose under the previous ownership. This risk is particularly high if you are not closely connected to the previous owner or if you do not have full visibility into the business’s past VAT practices.

Practical Considerations

If you decide to retain the VAT number when purchasing a business, it’s essential to:

• Thoroughly Review the Business’s VAT History: Before completing the transfer, ensure that you conduct a comprehensive review of the business’s VAT records to identify any potential liabilities or discrepancies. This due diligence can help you avoid unexpected tax bills.
• Maintain Access to Business Records: Although the business records legally remain with the vendor. They must make them available to you to complete your VAT returns. If necessary, HMRC can direct the vendor to pass the records over.
• Reapply for Special Schemes: Any special VAT schemes (such as the flat rate scheme or annual accounting) used by the previous owner will cease upon the transfer, and you will need to reapply if you wish to continue using them.
• Update Direct Debits: Ensure that the previous owner cancels any direct debits set up to pay online VAT returns, and set up your own direct debit instructions to avoid any payment issues.

Conclusion

Retaining the VAT number when buying a business can offer significant benefits in terms of continuity and administrative ease. However, it also comes with risks, particularly regarding inherited liabilities. It’s essential to weigh these factors carefully and seek professional advice if you’re uncertain about the best course of action. At Merranti Accounting, we’re here to help you navigate these decisions and ensure that your business acquisition goes smoothly. Contact us today to discuss your specific situation and how we can assist you.