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Avoiding the VAT trap
In light of a recent HMRC clampdown on Value Added Tax, bar, restaurant and hotel bosses are advised to tread carefully when purchasing premises. Allan Cuthbert explains how getting it wrong could lead the unwary buyer to incur unrecoverable VAT…
Imagine purchasing a closed-down restaurant that has gone into receivership, with a view to one day running it as a business again. While it may appear that you are not buying it as a going concern, HM Revenue & Customs may not share your view from the VAT perspective.
The latest assault by HMRC comes hot on the heels of its recent announcement that it believes a significant amount of VAT is going undeclared in businesses in the hospitality sector.
By their very nature, hospitality-related businesses close and reopen within a short period, and this area is therefore a real money-spinner for HMRC. Problems can arise when a prospective purchaser fails to realise the effect of buying a business where the property and trade have been placed in separate entities by the vendor. The VAT treatment of purchasing a property is quite different from that of buying the trading business, and has led to unsuspecting buyers incurring VAT that they cannot recover.
Before purchasing the assets of a restaurant, it would be wise to seek advice on how HMRC is likely to treat the VAT. How HMRC views the purchase of bar, restaurant and hotel premises will determine how much VAT is payable and when the business should be registered for VAT.
If the sale is not made as a going concern, you will not have to register the business for VAT until turnover exceeds the threshold of £61,000. However, if the restaurant is transferred as a going concern, it should be registered for VAT much sooner.
Stock is another common problem. There is often a separate price for on-hand stock that is based on a valuation carried out immediately prior to the purchase. It is important to realise that this is treated in the same way as the overall purchase of the business and not as a separate issue for VAT purposes.
If it is in your favour to transfer it as a going concern, ensure that elements of continuity - such as staff, the lease and equipment - are highlighted in the contract.
And if you want to avoid a situation where HMRC claws back VAT you omitted to charge, seek advice before you buy the premises. Be warned: getting this wrong can lead to your business incurring irrecoverable VAT.
Allan Cuthbert,
Senior VAT Manager
PKF Accountants & Business Advisers
This article has been edited from its original version. For the complete feature please see Catering in Scotland magazine September/October 2006.
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