When a business is sold, it begs the question whether VAT is payable on such a transaction or not? In most instances where a going concern is sold, a zero VAT rate would apply. However, there are a couple of pre-requisites which have to be met for the zero VAT rate application. The following questions are vitally important in this instance:

  1. Is the Seller a registered VAT vendor on the date of the transaction?
  2. Is the Buyer a registered VAT vendor on the date of the transaction?
  3. Is the business being sold as a going concern?

If the answer to all the above questions is yes, a zero VAT rate would apply for such a transaction, in other words no VAT would be payable in this instance. Under normal circumstances, if the Seller is a VAT vendor, such a sale (like most other sales) would attract VAT at the standard rate of 15%. This would remain the case if the Buyer of the business is not registered for VAT. However, SARS has recognised that, in most cases, the Buyer of such a business is also likely to be registered as a VAT vendor, and would simply claim the VAT paid as an input tax credit.

Given that the transaction as a whole ends up with no additional VAT coming to SARS, the Value-Added Tax Act, No 89 of 1991 (VAT Act) provides for transactions of this nature to be zero-rated. In other words, VAT is charged at 0%. This results in major relief to the Buyer’s cash flow, since the time-lag between paying out the VAT to the Seller, and then claiming it back from SARS, is eliminated.

If both Seller and Buyer are registered VAT vendors, at the time of the sale, it must be determined whether the business, or part thereof, which is being sold can operate as a going concern. Only one question has to be answered to conclude this determination. Is the business (or part thereof) capable of being operated as a stand-alone business in its own right? If the answer to this question is yes, all three boxes have been ticked and a zero VAT rate would apply.

Article by JC van den Berg, Business Practitioner at Bizcom.