Can sale with no goodwill charge still qualify as TOGC?

What is goodwill?

If you sell your business, a charge for goodwill represents the invisible value that exceeds the physical value of your assets. Let’s say you trade as a pub and sell equipment, stock, furniture and fittings worth £300,000, but you receive £500,000 from the buyer, the goodwill is £200,000. The extra payment reflects the intangible benefits you are selling, perhaps a loyal and profitable customer base; a well-known trading name with a good reputation; a skilled or experienced workforce.

A charge for goodwill is, as a starting point, standard-rated, but it will be outside the scope of VAT if a business sale qualifies as a transfer of a going concern (TOGC).

Business sale without goodwill

A charge for goodwill is an indicator of a business sale in HMRC’s view. This is important because if a business is being sold, rather than individual assets, the proceeds will not be subject to VAT if the conditions for a TOGC are met.

However, a business sale does not always include goodwill, e.g. if your business is unprofitable or not established in a particular trading market, the goodwill will probably be zero. In other words, the buyer will only pay you for the physical assets used in your business after they have taken it over. Nonetheless, it is still a business they are buying, despite the absence of the goodwill.

In some cases, a buyer will pay less than the physical value of assets, which is effectively a negative charge for goodwill, i.e. a financial gain or premium for the buyer. Again, it is still a business sale.

Goodwill is a reflection of expected trading success in the future. So, in some cases, a business with high past profits can still be sold without a charge for goodwill.

Evidence of a business sale

If you sell a business without charging goodwill, you should retain supporting information if you don’t charge VAT, i.e. because you have treated the sale as a TOGC. The following indicators will hopefully satisfy HMRC if an officer raises a query:

• Staff retention. If the buyer retains your staff, this is a strong indicator they are taking over your business activity.
• Customer base. If you give full details of your customers to the buyer, e.g. price and discount details, lists of key contacts, any special trading arrangements, ongoing contracts, this indicates a business sale. The same considerations will be relevant to suppliers.
• Trading name and premises. If the deal gives a buyer the right to use your trading name, or perhaps your business website, this is evidence of a business sale. It will also indicate a TOGC outcome if they take over any lease or rental agreement for your trading premises.

A TOGC can still apply if you sell part of your business, e.g. a hotel might sell its bar activity but retain the hotel rooms. You will consider the same issues in both cases.