Written by Nozizwe Mbambisa, MaxProf Auditor
Selling a business involves various tax considerations, particularly when it is sold as a going concern. One significant tax implication to consider in such transactions is VAT.
Understanding a Going Concern
A going concern refers to a business sold in its entirety, including assets, liabilities, and goodwill, and continues its operations post-transfer. For VAT purposes, this means the business will operate in the same manner after the sale, with the buyer continuing the taxable activities. In South Africa, if specific conditions are met, the VAT treatment of the sale of a going concern may be exempt under Section 11(1)(e) of the VAT Act.
Conditions for a Sale to Qualify as a Going Concern
For the transaction to qualify as a sale of a going concern, the following conditions must be met:
- Both parties must be VAT registered: Both the seller and the buyer must be VAT registered. If only one party is registered, the sale will not fall within the scope of Section 11(1)(e). The registration must be finalized and effective at the sale agreement’s finalization.
- The transaction must involve a going concern: The sale should occur while the business is still an income-earning enterprise, operating at full capacity. The business must be operational at the time of transfer and not cease operations during ownership change.
- The transfer must be of the business as a whole: The sale must include all necessary assets for the business to continue operations, such as inventory, fixed assets, goodwill, employees, and intellectual property. The assets must be used for the purpose of an enterprise.
- The business operation must be a taxable activity: The business being transferred must engage in selling goods or services subject to VAT. If the business deals exclusively in VAT-exempt activities, it will not qualify as a going concern.
- A contract between the two parties is required: Both the seller and buyer must agree in writing that the transfer qualifies as a going concern. A legal written contract must state that the sale is at a consideration inclusive of VAT at a rate of 0%.
Time of Supply
The time of supply for the sale of a business as a going concern is subject to Section 9(1) of the VAT Act. The time of supply is deemed to be the earlier of when the invoice is issued by the supplier or when the consideration is paid to the supplier. An invoice notifies an obligation to make payment. A deposit may be required to secure a sale or transfer, but it does not constitute consideration until allocated to the consideration.
Sale of a Branch or Division
Section 11(1)(p) of the VAT Act allows for the sale of an enterprise or part of an enterprise that is separately registered for VAT as a going concern. Additional conditions include the entity being capable of operating separately and being an income-earning activity on the date of transfer. A tax invoice must be issued inclusive of tax at the rate of 0%.
VAT Treatment on the Sale of a Going Concern
A sale that meets the conditions of Section 11(1)(e) qualifies as a going concern and attracts VAT at a zero rate. This results in:
- The seller not charging VAT on the sale price of the business or assets.
- The buyer not paying VAT on the acquisition of the business.
This provides financial relief to both parties.
Non-Qualifying Sales
If the sale does not meet the requirements of Section 11(1)(e), it will attract VAT at the standard rate of 15%, treated as a standard taxable supply for VAT purposes. In such cases:
- VAT is charged on the sale price of the business.
- The seller must account for VAT on the transaction at 15%.
- The buyer must pay VAT on the purchase price.
Continuity of the Business as a Going Concern
The business must maintain its going-concern status after the sale and transfer. It should meet financial obligations and continue as an income-generating activity for at least 12 months, without the risk of liquidation or operational interruptions. The transferred assets should be used to carry on the same type of business that constitutes a taxable supply per the VAT Act.
Conclusion
Both parties entering into a sale agreement as a going concern must ensure the sale is structured correctly and meets the VAT Act requirements under Section 11(1)(e). Recognizing a sale as a going concern offers financial relief and potential burdens. The buyer must mitigate risks through due diligence and professional assistance.
