A disposal of a business or part of a business capable of separate operations by a registered operator as a going concern is deemed to be a supply made in the furtherance or course of the operator’s trade. The seller should account for output tax on the disposal, but with proper planning no VAT is payable, the disposal can be zero rated. The purchaser would not need to finance the VAT between making the VAT payment to the supplier and receiving a VAT refund from ZIMRA. We discuss the law on zero rating and the conditions that must be satisfied for the VAT to be avoided.
The Law and interpretation
A sale or transfer of a going concern is zero rated under s 10(1) (e) of the VAT Act as read with s12 of the VAT General Regulations, 2003 (SI 273 of 2003) which provides that “subject to proviso (ii) of paragraph (e) of subsection (1) of section 10 of the Act where the trade or part of a trade, as the case may be, is disposed of as a going concern and has been carried disposed of as a going concern (underlined words appearing to be drafting error) and has been carried on in, on or in relation to goods or services applied mainly for purposes of such trade or as simple of a trade, as the case may be, and partly for other purposes, such goods or services shall, where disposed of, be taxed at zero % if the sale represents the disposal of at least 51% of the trade or part of a trade”. We analyse the key conditions as follows:
Seller and purchaser to be both registered
The sale should be effected by a registered transferor to a buyer who is also a registered operator. In order to safeguard himself from incorrectly applying the zero rate, the seller must obtain and retain a copy of the purchaser’s registration certificate. If the purchaser is not yet a registered operator at the time of the conclusion of the agreement, it is advisable that the agreement provide for the application of the zero rate being subject to the purchaser being a registered operator on the date the supply takes place, and to furnish a copy of the VAT certificate to the seller as soon as it is available.
Agreement must be in writing
The parties must agree in writing that (i) the trade is disposed off as a going concern and (ii) that it will be an income earning activity on date of transfer. Where an agreement for the sale of a trade as a going concern was concluded before, on or after commencement date, but the parties did not agree in writing that the trade is disposed off as a going concern they may enter into a separate agreement – based on the original contract – regarding this aspect. The written agreement(s) must, together with any other written agreements or documents relating to the sale, be retained. The agreement need not necessarily form part of the arrangement under which the ‘supply of a going concern’ is made. Below is an analysis of the conditions that must be agreed in writing by the parties:
The trade must be a going concern
A business transferred must be a going concern before and immediately after the transfer. This disqualifies any business which has actually ceased operation before the transfer. It was held in Belton v. CIR (1997) 18 NZTC 13,403 that there can be no going concern’ where, on the day of the supply, the activity carried on by the enterprise has ceased. A short period of break or temporary closure immediately after the transfer to facilitate the smooth transfer or for purposes of cleaning and maintenance etc. does not however disqualify the sale as a transfer of a going concern. The activities must be capable of continuing after the transfer to new ownership. The transferee must use the transferred assets to continue with the same kind of business of the transferor, if the nature of business changes it ceases to be a sale of a going concern.
Supply of an income-earning activity
There must exist an income earning activity on the date the ownership of the trade is transferred. As transfer of the trade might take place only in the future, there can be no certainty at the time of signing the agreement and fixing the VAT inclusive price whether the trade will in fact be as an income-earning activity when transfer takes place. The parties’ intention to transfer an income-earning activity is thus sufficient. The agreement must provide for the sale of an income-earning activity and not merely a trade structure. The new owner must be placed in possession of a trade which can be operated in that same form, without any further action on his part. For this reason an agreement to dispose off a business yet to commence or a dormant business is not a going concern.
Assets necessary for carrying on the trade must also be disposed
Assets which are necessary for carrying on a trade must be disposed off by the supplier to the recipient for zero rating to apply. Where all the assets used by the registered operator in a trade, except the premises from which the enterprise is conducted, are disposed of, it must be determined whether the premises are necessary for carrying on the trade disposed of. The assets or things which are necessary for the continued operation may vary according to the nature of the trade and the thing supplied and each case must be treated based on its facts.
Due to several rules needed to satisfy the requirements of a going concern you will almost certainly need an advisor to guide you through the process. There are serious tax ramifications if the attempt to zero rate the transaction fails. The VAT will become due, penalty and interest certainly apply for failing to pay the VAT due on time. Meanwhile Matrix Tax School will be hosting its Cross Border Taxes Seminar on the 17th of July 2019. Marvellous Tapera is the Founder of Tax Matrix (Pvt) Ltd and the CEO of Matrix Tax School (Pvt) Ltd. He writes in his personal capacity.