GEORGE BUSINESS NEWS - When disposing of a business, it is normally not done by selling the assets comprising the business, but by selling the business as a going concern. Merely selling assets would attract VAT at the applicable rate. Selling a business as a going concern, on the other hand, can be structured in such a way that the transaction, from a VAT point of view, would be zero-rated. Important to note is that it is not an exemption from VAT, but applying VAT at a zero rate.
To merely state in the agreement of sale that the business is sold "as a going concern" is not sufficient.
The key to the correct structuring of the agreement lies in the provisions of section 11 of the Value-Added Tax Act, No 89 of 1991 (the VAT Act) and in particular section 11(1)(e) thereof, which has the following requirements that have to be met:
- Both the seller and the purchaser must be registered as VAT vendors as defined in the VAT Act;
- The supply (subject of the sale) must consist of an enterprise or part of an enterprise which is capable of separate operation;
- The parties must state specifically in their agreement of sale that the supply is a going concern;
- The parties must agree in their written agreement of sale that the enterprise will be an income-earning activity on the effective date, being the date of transfer or take-over of the business;
- All the assets necessary for carrying on the enterprise, must be disposed to the purchaser; and
- The parties must state in the agreement of sale that the consideration for the supply (the purchase price) includes VAT at a zero rate.
It would be prudent to ensure that a specific clause, containing all the above requirements, be included in an agreement of sale of any going concern in order to bring the transaction within the realm of a zero rated transaction.
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