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Customs require anyone operating the cash accounting scheme to account for VAT on all supplies made up to the date of cessation (regardless of whether or not those sums have been received). That rule is reasonable enough.
Customs require anyone operating the cash accounting scheme to account for VAT on all supplies made up to the date of cessation (regardless of whether or not those sums have been received). That rule is reasonable enough. But the case of Vaghela Unadkat & Co (17331) and other items which I have seen over the years would seem to imply that, in all cases where cash accounting is in point and the new owner of a trade takes over the debts, he (the new owner) will also be liable to pay output VAT on the sums received if he too was operating the cash accounting scheme.
It seems that the only way around it is for the new owner of the business not to take over the debts of the transferor if he, the transferee, intends to operate the cash accounting scheme as well.
Is my understanding of this issue correct? Readers' comments would be appreciated.
(Query T16,112) - Double trouble.
The answer is easy. Finding it was difficult - or, rather, time-consuming!
It would obviously be wrong for both the vendor and the purchaser to have to account for value added tax on the same sale. However, a quick reference to Part VIII of the VAT Regulations (SI 1995/2518) and to Notice 731 (March 2002) failed to uncover the answer. Paragraph 5.7 of the Notice shows that, If the parties agree that the purchaser will take over the VAT registration number, there is no problem. However, if the vendor retains and then cancels his VAT registration, he must indeed account for the output tax. It is then up to the purchaser to decide whether or not to use cash accounting. It is typical of the minimalist style of current notices that nothing is said in paragraph 5.7 about the seeming obligation for double payment.
Only persistence because 'this cannot be right' then leads one to look at what the Notice says about anyone starting to use the scheme. The guidance in paragraph 2.5 is far from clear because it is written on the assumption that the reader is beginning the scheme either immediately on registering or after a period of trading. Only in the latter case does it say 'you must ensure that you avoid the risk of accounting for VAT twice on any supplies made or received before you began to use the scheme'. It then makes it a legal requirement to identify and separate in the records any payments received or made for transactions already accounted for under the normal method of VAT accounting. Presumably, Customs make that a legal regulation so as to prevent double recovery of input tax.
Although the Notice has no heading 'What if I take over the debtors and creditors of an existing business and register immediately', and although the wording above does not explicitly cover that situation, it obviously does so as a matter of practical common sense. Moreover, I believe that the legal wording 'already accounted for under the normal method of VAT accounting' can be interpreted to cover a transfer of going concern situation. - John Price.
It seems that there is confusion here. The decision in the case quoted merely confirmed that, on cessation of a business, VAT has to be accounted for on all supplies made up to that date (less any deduction for input tax on unpaid purchases). There is an exception, whereby if there is a transfer of a going concern and the transferee takes over the existing registration number, cash accounting can continue to apply to the pre-transfer debtors. In the case mentioned, as the business was split between the partners, the VAT tribunal held that the exception could not apply. So the discontinued partnership, which was in the cash accounting scheme, remained liable for payment of VAT or the sums due from clients at the date of cessation.
The VAT on pre-transfer supplies was due and payable two months after cessation and is a debt of the partnership. The cash finally received by each new business is not in respect of a taxable supply and the VAT element does not have to be accounted for to Customs, but it may have to be accounted for between the partners.
It looks simpler, but not essential, for the debts not to be transferred. In that event there will be no question of the transferee having a VAT liability on them. - R.N.G.
