Buying a business is a big decision. However, once you've made the decision you need to get the tax aspects right to make sure the amount you expect to spend on the prospective business is what you end up paying.
If the business is owned by a company or close corporation (CC), the income tax consequences should influence whether you buy the company's shares or CC's membership orits business assets and liabilities as a going concern.
If you decide to buy the shares or membership in the CC there are no VAT consequences.
But there are VAT aspects you should know about if you decide to buy the going concern, or if the seller owns the business directly, and you and the seller are VAT vendors.
Firstly, the VAT Act allows the seller to sell a going concern which can continue to operate as an entity on its own at a zero rate of VAT.
When you agree on a purchase price with the seller to buy a going concern, you need to set a price which is the final price, ie there will be no VAT to claim as a refund, even though, generally the VAT Act deems prices to be inclusive of VAT.
If you buy on this basis, it is vital to ensure that you have fulfilled certain requirements:
The buyer and seller must both be registered VAT vendors for zero-rated VAT to apply, so it is important you supply the seller with a copy of your VAT registration certificate, and probably wise that you get a copy of the seller's certificate.
The sale agreement must
contain the wording that the transaction is a sale of a going concern and
that the business operation will be an income earning activity at the date of sale.
But if, for example, you are the only tenant of a commercial building, which you then buy, you have acquired a capital asset and the leasing business conducted by the seller can no longer continue. Consequently the going concern provisions cannot apply.
If any of the criteria set out above relating to the sale of a going concern do not exist, then you will have to add VAT to the purchase price stated in the sale agreement, and pay it to the seller.
Although you will be able to claim a refund of the VAT from the tax authorities on your next VAT return if you are a registered VAT vendor, this could have serious implications for your cash flow because you may have to wait some time before you get the refund.
A further aspect, which could affect your pocket from a VAT point of view, will arise if you buy a business as a zero-rated going concern but part of that business does not relate to the making of VATable supplies.
In that case you will need to pay a deemed VAT output tax on the value of that portion of the purchase, if it exceeds 10 percent of the total value (but if it is less than 10 percent, no adjustment is needed).
For example if you are buying a farm for R1 million on which there is a farmhouse worth R150 000. The farm produces fruit which is sold on a business basis, you and the seller are VAT vendors and, consequently, the purchase is zero-rated for VAT purposes as the sale of a going concern.
But the farmhouse is not part of business of making VATable supplies and so you will be required to pay VAT of R18 421 to the tax authorities, being the VAT included in the purchase price relating to the farmhouse.
Buying a business can be a stressful experience, it's important not to let it also become an expensive experience due to unexpected VAT consequences.