Section 11(1)(e)(i) of the Value Added Tax Act, No. 89 of 1991 (“VAT Act”) imposes that the following 3 (three) peremptory requirements must be satisfied in order for an enterprise to be disposed of as a going concern –

  1. the supplier and the recipient must, at the time of the conclusion of the agreement for the disposal of the enterprise or part thereof, as the case may be, have agreed in writing that such enterprise or part thereof, as the case may be, will be an income-earning activity on the date of transfer of the enterprise;
  2. the assets which are necessary for carrying on such enterprise or part thereof, as the case may be, are disposed of by the supplier to the recipient; and
  3. the supplier and the recipient have, at the time of the conclusion of the agreement for the disposal of such enterprise or part thereof, as the case may be, agreed in writing that the consideration agreed upon for that the supply of the enterprise is inclusive of tax at the rate of zero per cent.

If the abovementioned requirements have been satisfied, value added tax (“VAT”) will be applied at a rate of zero per cent on the transaction, which results in the purchaser not being liable for the payment of VAT on the purchase price of the enterprise.

It must be noted that notwithstanding the fact that the parties may have intended, and so recorded, that the transaction will be zero-rated for VAT, if it transpires that the position factually incorrect, the purchaser will be liable for the payment of VAT at the standard rate of 14% (fourteen percent), irrespective of what the parties had intended.

The above is a critical assessment to be made as it forms part of the financial considerations to be made by the purchaser of the enterprise. If the determination is not made accurately, or has not been accounted for at all, VAT will be applied at the normal rate of 14% (fourteen percent) on the transaction.