VAT implication on retaining goodwill

[SYR]

I hope someone would offer help on the followings:

One of my clients purchased an existing business as TOGC 5 years ago. He paid: freehold £150k, goodwill £60k, F&F £8k and stock £2k . Due to ill health, he has decided to grant a 5 years short lease and rent the property/business to a relative.

It has been agreed that the stock £2k and F&F £3k are to be transferred / sold to the relative but not the goodwill. No premium is charged on the 5 year leasehold. My client is retaining the goodwill as he intends to take over the business in five years time.

My questions are:
Can this transaction be treated as TOGC?
Since he paid £60k for the goodwill, does he has to pay for VAT when he de-registers for VAT?
It is advisable for him to keeps his VAT registration and charges his rent (£15k per annum)?
The business is registered for FRS so no input VAT can be claimed.

Your advice would be appreciated.
SYR

[les35]

There are a number of technical issues here: not just the goodwill, but the transfer of the property. You have assumed it was a TOGC, but I would prefer to check that, as it may have implications for the current question. What is the nature of the property? Is it Opted?
If the property itself is let to a third party, but not the business, then it cannot be a TOGC. But, as above, I think a detailed review of documentation is your best option for this type of complex issue.

[SYR]

Thank you Les35

I have set out answers to your questions as follows:
- The nature of the property is a shop selling hot food takeaways.
- The property is not opted
- Property to let to a third party - my client's relative is going to set up a limited company to carry on the same trade, using the same trading name but not paying for the goodwill.
- The company will pay for the stock and F&F, and responsible for the rent.

[section 44]

my client's relative is going to set up a limited company to carry on the same trade, using the same trading name but not paying for the goodwill.

So will the stock/assets be transferred by:

1. your client to the relative and then from the relative to the new company; or

2. your client direct to the new company?

[SYR]

Hi Section 44

stock/assets to be paid by the new company
client's relative to be the director of the new company

[les35]

Assuming the new owner is registered for VAT, it does appear to be a TOGC, and therefore the transfer not liable to VAT.
But, neither Secction 44 nor myself have seen documentation, which may of course contain other details.

[section 44]

What's the annual turnover?

[SYR]

The turnover is around £135k.

The crucial other question is whether my client has to pay VAT on cessation (VAT de-registration) in relation to goodwill or keeps his VAT registration and charge rent at zero rate??

[les35]

rent cannot be zero rated, but might be exempt.
With no stock and other assets at cessation, no output tax is due; but the deemed supply of the property will be exempt, in the absence of an Option. This might have an impact on earlier Returns.

[SYR]

I thought goodwill is an asset and it's subject to VAT.

If my client ceases trading and de-registers for VAT, does he need to declare goodwill as an asset?? The next question would be how much do we put a value on current goodwill - historical value?