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Where Taxpayers and Advisers Meet

Liquidation, non-VAT registered, 100k stock

Incredulum
Posts:2795
Joined:Thu Dec 03, 2009 5:35 pm
Liquidation, non-VAT registered, 100k stock

Postby Incredulum » Thu Apr 08, 2021 10:27 am

It is desired to liquidate a company following the death of the majority shareholder. The balance sheet is 100k share capital, represented by 100k of stock. The company is not (and never has been) VAT registered, having always traded below the registration threshold.

What is the VAT consequence of transferring the stock to the shareholders?

Thank you.

les35
Posts:635
Joined:Wed Aug 06, 2008 3:09 pm

Re: Liquidation, non-VAT registered, 100k stock

Postby les35 » Thu Apr 08, 2021 1:48 pm

The supply of £100k worth of stock will breach the 'future turnover' rule and require immediate registration for VAT. If the recipient is or will become registered then this presents no problem.

Or, I wonder if you can transfer the shares rather than the stock. I think professional advice essential on this one if you want to 'avoid' the VAT charge.

Incredulum
Posts:2795
Joined:Thu Dec 03, 2009 5:35 pm

Re: Liquidation, non-VAT registered, 100k stock

Postby Incredulum » Thu Apr 08, 2021 6:10 pm

Thank you for your thoughts. Is it turnover though? The recipient does not intend to continue trading, so TOGC cannot apply.

Is the liquidator's action of Credit share capital Debit Stock really giving rise to turnover? If we also Credit Turnover, what do we Dr?

The shareholders are the executors. It would rather defeat the aim to transfer the shares to them as they already have them...

Trevor S
Posts:108
Joined:Tue Jan 01, 2019 12:37 am

Re: Liquidation, non-VAT registered, 100k stock

Postby Trevor S » Thu Apr 08, 2021 7:02 pm

I would agree with Les that the transaction seems liable to VAT. Supply of goods (the stock) is made in return for consideration (the shares). So, two options that I can see:

If time isn't an issue, "sell" some of the stock in return for some of the shares now, and then the rest in (say) a year's time, making sure that the company doesn't exceed the £85k limit over any 12 month period.

Otherwise, if the company has full records and the stock is less than four years old, register for VAT, declare the output tax on the sale, but reclaim input tax on the purchase as pre-registration expenses: https://www.gov.uk/vat-registration/purchases-made-before-registration

Trevor S
Posts:108
Joined:Tue Jan 01, 2019 12:37 am

Re: Liquidation, non-VAT registered, 100k stock

Postby Trevor S » Fri Apr 09, 2021 8:46 am

I've slightly re-thought my opinion overnight! I still think that if this is done as a single £100k transaction, you'll trigger registration under the forward look.

However, considering the split approach, with the initial transaction being greater than £17k but less than £85k:
  • Transaction 1 won't trigger the forward look. Depending on how recently the company traded "normally", it might trigger the backward look. But the company could apply for exception from registration on the basis that transactions over the following year wouldn't exceed the deregistration threshold - see: https://www.gov.uk/hmrc-internal-manuals/vat-registration-manual/vatreg19050. This should be easy to demonstrate - as you can show that the company is in the process of being liquidated, and the value of remaining stock is less than the deregistration threshold.
  • Transaction 2 (for the remainder) would only need to wait until the later of agreement to the VAT exception or one month after transaction 1 (to avoid triggering the forward look). Even if transaction 1 didn't trigger the backward look, transaction 2 would. But you could then apply for exception (as above) as the company would have nothing left to sell, so definitely below the deregistration threshold in the following year.

Incredulum
Posts:2795
Joined:Thu Dec 03, 2009 5:35 pm

Re: Liquidation, non-VAT registered, 100k stock

Postby Incredulum » Fri Apr 09, 2021 9:25 am

Thank you, I appreciate your input greatly.

I am not sure how you imagine a two-stage liquidation.

The stock would all be subject to the margin scheme. Registering for VAT would allow some VAT to be reclaimed for the periods prior on running costs etc.

It seems to me there are two options.

1. Register for VAT, register the executors for VAT and treat it as a TOGC, and then deregister the executors when they cease trading a week later. Would there be any VAT charge on the executors? If the executors then sell the items, are they still trading VAT-ably?

1b. If the executors distribute the items to the beneficiaries and the beneficiaries dispose of them, are there VAT implications? There's no consideration. And on the basis less than the entirety is transferred (on the basis that the beneficiaries are not acting in partnership) then TOGC cannot apply.

2. Register for VAT, don't treat it as a TOGC. Treat all the stock as not having increased in value so (margin scheme) no VAT due. This is probably a fair enough basis of valuation, this is a fire-sale valuation, property was mostly acquired at auction over the last few years. Are these then non-trading assets in the hands of the executors, even if they appoint a third party to sell them?

Trevor S
Posts:108
Joined:Tue Jan 01, 2019 12:37 am

Re: Liquidation, non-VAT registered, 100k stock

Postby Trevor S » Fri Apr 09, 2021 5:32 pm

I'm not an accountant, so am purely looking at this from a VAT angle! I certainly haven't been involved in liquidations of companies by executors! But in my two stage idea, do both stages have to be part of the "liquidation"? Say there's two shareholders, with 50% of the shares each. Could transaction 1 be the company (pre-liquidation) effectively buying back one shareholder's £50k stake in the company using half of the goods in stock? Transaction 2 would then be the liquidation itself, with the sole remaining shareholder getting the other half of the goods.

On your options:
1. Generally there can only be a TOGC if a business is being sold to a buyer that intends to continue running the business. But even if a TOGC could be achieved, there would be a VAT issue on deregistration - notice 700/11, section 7.2 specifies that you must account for output tax on stock that was transferred to the deregistering organisation through a TOGC.
2. Depends on what valuation method was accepted. Would the value of the company's supply to the shareholders would be regarded as that of the "consideration" - the £100k of shares? If so, and if this is greater than the amount that the company paid at auction, there would be a margin on which VAT would be due.

Incredulum
Posts:2795
Joined:Thu Dec 03, 2009 5:35 pm

Re: Liquidation, non-VAT registered, 100k stock

Postby Incredulum » Mon Apr 12, 2021 6:10 pm

Trevor S, thank you for oyour further thoughts. I knew there was something somewhere in the guidance. Here, from VAT notice 7009.
2.2.5 TOGC where the seller is not registered for VAT
There can be a TOGC where the seller is not registered for VAT. For example, because the seller is trading below the registration limit. The sale of a non VAT-registered business which includes trading stock, the value of which might otherwise take the trader over the registration limit, will not do so because it can be treated as a TOGC and therefore not a supply.
So the Company can do a TOGC on liquidation provided the executors continue to trade for a while - two or three weeks, presumably, will be enough?

Then they can distribute the assets to the beneficiaries, and nobody need ever worry about VAT?

Incredulum
Posts:2795
Joined:Thu Dec 03, 2009 5:35 pm

Re: Liquidation, non-VAT registered, 100k stock

Postby Incredulum » Mon Apr 12, 2021 6:20 pm

Your two-stage idea sadly doesn't work as the company requires sufficient distributable reserves in order to be able to undertake a share buyback. The company is heavily over-capitalised. If it were to reduce its share capital in order to create distributable reserves (as indeed it could), then I guess it could do a buyback, but it is likely the shareholders would be charged to income tax on the proceeds as they wouldn't qualify under the conditions for capital treatment. Not good news!

Trevor S
Posts:108
Joined:Tue Jan 01, 2019 12:37 am

Re: Liquidation, non-VAT registered, 100k stock

Postby Trevor S » Tue Apr 13, 2021 7:11 am

The same VAT notice also states:
7.1 Trading activities after a business is transferred
You must check whether the person buying your assets intends to operate the business in the same way as you. For example, you may choose to insert a warranty about the buyer’s intentions in the sale agreement.
This is because the TOGC rules apply where both the:
• seller is selling the assets of all or part of a business which is being transferred as a going concern
• buyer intends to use these to run the same kind of business
There must be continuing business activity, rather than the mere acquisition of assets with a view to liquidation or instantaneous disposal.
On the final sentence, continuing to trade for a few weeks first doesn't (in my opinion) stop the reason for the acquisition being the intention to liquidate. I wouldn't feel able to justify any other reason for the executors buying the business. And even if you could justify it, wouldn't you still have an unregistered organisation (the executors) making supplies of goods worth in excess of the VAT registration threshold?


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