In the business world, “disposal” usually means selling. However, there is a big difference between selling individual items and selling a business setup that is still running.
When you sell business assets as a “Going Concern” (often called a Transfer of a Going Concern or TOGC), you are not just selling tables, chairs, or machinery. You are selling the “live” ability to do business.
For example, a restaurant closes down. It sells its ovens to one buyer, its tables to another, and its brand name is abandoned. This is just a sale of goods. On the other hand, if the restaurant owner sells the entire restaurant, including the ovens, tables, brand name, staff contracts, and the lease, to a new owner, the sale is a disposal of a business as a going concern. The new owner walks in the next day and continues serving food to customers without interruption.
Around the world, the standard VAT treatment for a TOGC is that it is considered ‘Outside the Scope of VAT’ or ‘Neither a Supply of Goods nor Services’.
This means that even though money is changing hands for valuable assets, the seller does not charge VAT on the transaction invoice.
Tax authorities generally remove VAT from these transactions for two main practical reasons:
- Preventing Cash Flow Issues: Business sales often involve huge sums of money. If a business is sold for $1 million and VAT is 5%, the buyer would have to pay $50,000 in tax upfront. The buyer would eventually claim this back from the government, but paying it initially creates a massive cash flow burden. By making it ‘outside the scope, the buyer doesn’t have to find that extra cash.
- Administrative Efficiency: It saves the tax authority from the merry-go-round of collecting a large amount of tax from the seller, only to immediately refund it to the buyer.
In the UK, a transfer of a going concern is treated as ‘Neither a Supply of Goods nor Services’. The key condition is that the buyer must use the assets to carry on the same kind of business as the seller. For example, if a florist sells their shop to a baker, it might not qualify because the business type has changed.
In Pakistan, the treatment is slightly different in legal terms but achieves a similar result. Under the Sales Tax Act, 1990, the transfer of a business as a going concern to another registered person is often treated as a Zero-Rated Supply, subject to certain conditions.
While the UK treats it as ‘no supply at all’, Pakistan treats it as a ‘taxable supply charged at 0%’. The buyer still pays no tax, but the transaction is technically recorded within the tax net rather than being completely outside of it.
Treatment in the UAE
In the UAE, the Transfer of a Going Concern (TOGC) is treated as ‘Out of Scope’ (i.e., Not a Supply. This means no VAT is charged, provided specific conditions are met.
For a transfer to qualify as a TOGC in the UAE, the following three conditions must be met:
- Transfer of a Business (Whole or Part): You must be transferring a business or an independent part of a business (like a specific branch), not just a random collection of assets.
- Transfer to a Taxable Person: The buyer must be a taxable person. This means they must be registered for VAT or obligated to register for VAT as a result of the transfer.
- Intention to Continue: The buyer must intend to use the assets to continue the same business operation. If they buy a factory just to shut it down and sell the machines, it does not qualify.
In any Jurisdiction, business owners and accountants must verify the proper tax treatment for each type of transaction. For past transactions, it is one of the best practices to undertake periodic internal tax audits through an independent auditor to assess the need for any adjustments or corrections to mitigate tax penalties.
The information in this article is provided for general informational and educational purposes only. It is not intended to constitute, and should not be relied upon as, legal, tax, or professional advice. The application of tax laws, including VAT, is highly dependent on the specific facts and circumstances of each individual or business. We strongly recommend that you seek independent advice from a qualified tax professional or legal counsel before taking any action based on the content of this article. We assume no responsibility for any errors or omissions, or for the results obtained from the use of this information.
