Death of a business owner and VAT
Death of a business owner and VAT
Your spouse died recently and you're executor of his estate. One of your tasks is to bring his VAT returns for the business up to date. You've heard there's a special VAT charge is this situation, is that correct?
Death of VAT-registered person
The general rule for VAT is that when a person deregisters there's a "deemed supply" of their business assets and VAT must be paid as if they had been supplied to a customer. The notional customer in this situation is the deceased's estate. Of course there's no VAT to account for in respect of assets which are exempt, zero-rated or outside the scope of VAT. For other assets, e.g. tools and equipment, VAT is payable at the normal rates, which for most items is the standard rate (20%).
Tip. If the VAT on the deemed supply is £1,000 or less, no VAT has to be paid. Apart from this there are two other exceptions to the deemed supply rule.
First exception - trade continues
If the deceased was a sole trader and their business is carried on by the estate's executor, there is no deemed supply. The same VAT registration continues but in the name of the executor.
Tip. The executor is only responsible for VAT relating to the business from the date they take over. Any VAT due before then remains the liability of the estate.
Second exception - business transfer
If the executor sells or transfers the business or all its assets, there is an actual supply of goods on which VAT may or may not need to be accounted for. If one person (individual, company or partnership) acquires the assets and intends to carry on a similar business, it will be a "transfer of a going concern" (TOGC) and therefore outside the scope of VAT. This applies even if there's a hiatus between the death of the business owner and the sale/transfer of the business.
Trap. This exception doesn't apply if the assets are sold off piecemeal, meaning that no purchaser can be said to be carrying on the same business as the deceased using its assets. In those circumstances the Executor must charge the purchaser VAT at the appropriate rate for each asset.
Company - trade continues
Because a company is a "person" in its own right for legal, general tax and VAT purposes, its business might not come to an end as a result of its owner's death. For example, if the company has employees, while its trade will probably be disrupted because of the death of its owner manager, it's likely to continue trading, at least in the short term. Naturally, as you would expect, the VAT registration also therefore continues.
Companies - trade ceases
However, if the deceased ran their business through a company and was its only worker, its trade inevitably ceases with the owner's death. A business which has ceased to trade must deregister for VAT within the following 30 days. The usual deregistration rule then applies, i.e. there's a deemed supply of its assets.
Tip. The TOGC rules (see "Second exception") can equally apply to a company as they can a sole trader.
The normal rule is that if a business ceases when the owner dies it must deregister for VAT. As a consequence it is deemed to have supplied all its assets as if they had been sold, meaning that the estate must pay VAT on the value of the assets at the appropriate rate for each. However, if the VAT would be no more than £1,000, nothing has to be paid.