Delecia Venter - Tax Director | PKF Port Elizabeth

The term “going concern” is essentially describing an entity conducting business activities and will continue to conduct business for the foreseeable future. It is essential for parties to understand the VAT implications on the sale or purchase of a going concern.

What are the Requirements for a Going Concern per the Vat Act?

The VAT Act considers the sale of a going concern as a supply of service which is subject to a rate of 0% permitted it meets the following requirements:

1.    Both the seller and purchaser are registered VAT vendors.

2.    Both the seller and purchaser agreed in writing that the business is disposed of as a going concern.

3.    Both the seller and purchaser must agree that the business will be an income-earning activity on the date of transfer.

4.    That the assets necessary to continue its income earning activity will be disposed of to the purchaser.

5.    That the agreement concluded specify that the consideration for the supply of a going concern includes VAT at 0%.

Pressing Questions 

There are uncertainties as to when a purchaser is required to be a registered VAT vendor for an agreement to qualify as a going concern for VAT purposes. Below are some of the most pressing questions asked:

•    Should the purchaser be a registered VAT Vendor at the time of signing the agreement?

•    Should the purchaser be a registered VAT Vendor at the time when the transfer takes place?

When should a Purchaser be Registered as a Vat Vendor?

1.    The sale of a going concern is considered a supply for VAT purposes. 

2.    The general rule for time of supply, is the earlier of an invoice issued or payment of consideration received. This also applies when fixed property forms part of the disposal of the enterprise as a going concern.

3.    Essentially, a purchaser should be a registered VAT vendor at the time of supply.

4.    It is not a prerequisite for a purchaser to be a registered VAT vendor at the date of signing the agreement unless it coincides with the time of supply rule for VAT purposes.

Despite it not being a requirement at the time of signing the agreement, the purchaser must at the very least have applied for VAT registration before concluding the agreement with the seller. Failure by the purchaser to apply for registration before signing the agreement, will result in the sale being treated as a standard rated supply (15%).

5.    The “transfer date” or “effective date” of an agreement, is considered the date which the seller is legally required to transfer the business to the purchaser.  It is not a prerequisite for a purchaser to be a registered VAT vendor at “transfer date” unless, depending on the agreement structure, the “transfer date” agrees with the time of supply rule.

Recommendations

1.    In the event the purchaser is not a registered vendor at the time of concluding of the agreement, the agreement of sale must be conditional upon the purchaser being a VAT vendor at the time of the supply. 

2.    It is therefore imperative that the sale agreement includes a clause stating that 0% is conditional upon the purchaser being a registered VAT vendor at the time of supply. 

3.    Additionally, the parties may consider aligning the time of supply with the effective date (e.g., by ensuring that payment and invoicing occur on the date of transfer) to avoid complications).

Where you are unsure whether the transaction will meet or has met the requirements for a going concern per the VAT Act, please contact your nearest PKF office for assistance.