Finance Act 2005: VAT Treatment on the Sale of a Business - International Law Office

The Finance Act 2005 seeks to clarify the provisions relating to value added tax (VAT) on the transfer of assets as part of the sale of a business or undertaking in comparison with the delivery of goods or assets in other circumstances. Section 94 of the act amends Section 3(5)(b)(ii) of the VAT Act 1972 in this regard.

VAT is ordinarily charged on the delivery of goods by an accountable person in the course of business in accordance with the provisions of Section 2(1)(a) of the VAT Act. Section 3(1)(a) provides that 'delivery' includes the transfer of ownership of such goods by agreement. Section 5(b)(iii) originally provided that the transfer of ownership of goods in connection with the transfer of all or part of a business was deemed not to constitute delivery of such goods (except in certain limited circumstances relating, for example, to motor vehicles and radios and televisions) for the purposes of Section 3(1)(a), and thus was not subject to VAT. While Section 5(b)(iii) as amended does not alter this position, it clarifies the circumstances in which the transfer of all or part of the goods (or assets) of a business can be exempted from VAT.

Section 5(b)(iii) follows the requirements of the Sixth VAT Directive (77/388/EEC) - in particular Article 5(8), which exempts the supply of certain goods from VAT. Article 5(8) provides that:

"In the event of a transfer, whether for consideration or not or as a contribution to a company, of a totality of assets or part thereof, member states may consider that no supply of goods has taken place and in that event the recipient shall be treated as the successor to the transferor."

The provisions of Article 5(8) have been interpreted in a number of Irish High Court cases including O'Shea v Colle Parkview Service Station Limited (unreported, May 25 2000), where Justice McCracken held that the correct test required an assessment of whether "the circumstances are such that the benefit of the business is in fact transferred". Previous (and conflicting) interpretations of the law indicated that clarification of the applicable provisions on the transfer of assets on the sale of a business was required at a European level. This clarification came in the form of the European Court of Justice (ECJ)'s decision in Zita Modes Sarl v Administration de l'enregistrement et des domaines (November 27 2003), which provided that Article 5(8) is essentially concerned with the transfer of businesses or undertakings and not mere physical assets. It does not extend to "the simple transfer of assets, such as the sale of a stock of products". The ECJ further provided that the transfers covered by Article 5(8) "are those in which the transferee intends to operate the business or the part of the undertaking transferred and not simply to immediately liquidate the activity concerned and sell the stock if any".

Section 5(b)(iii) reflects the Zita Modes Sarl decision and is now worded specifically to refer to the disposal of "a totality of assets or part thereof of a business" to a taxable person, so as to differentiate from the sale of goods by a business which will be subject to VAT. The business relief exemption will apply where the assets being transferred constitute an undertaking or part of an undertaking that is capable of being operated as an independent business. While the Finance Act 2005 does not elaborate on what is meant by an 'independent business', it is assumed that this term may be assessed on the basis of commercial considerations such as whether the goodwill, stock in trade, debtors, liabilities, financial assets or employees of the undertaking concerned are being transferred. This exception may apply even if the business or part of the business has ceased trading, and whether the transfer is for consideration or not.

For further information on this topic please contact Gerard Halpenny at LK Shields Solicitors by telephone (+353 1 661 0866) or by fax (+353 1 661 0883) or by email (ghalpenny@lkshields.ie).