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Cite as: [2013] UKFTT 226 (TC)

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H Q Graphics Ltd v Revenue & Customs [2013] UKFTT 226 (TC) (11 April 2013)
VAT - BUSINESS
Acquisition as going concern

[2013] UKFTT 226 (TC)

TC02640

Appeal number: TC/2012/02863

VAT – INPUT TAX – Article 5 of VAT (Special Provisions) Order 1995 – sale of printing machinery and office equipment to appellant not to be treated as a supply of goods on basis the seller of the machinery and equipment had transferred its business as a going concern to the appellant - – appeal dismissed

FIRST-TIER TRIBUNAL

TAX CHAMBER

	H Q GRAPHICS LIMITED	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S	Respondents
	REVENUE & CUSTOMS

TRIBUNAL:	JUDGE SWAMI RAGHAVAN
	MICHAEL BELL ACA CTA

Sitting in public at 45 Bedford Square, London on 23 August 2012

Howard Moss, chartered accountant of Kingswood Chartered Accountants for the Appellant

Lynne Ratnett, Officer of HMRC for the Respondents

DECISION

Introduction

1. This appeal relates to HMRC’s decision to disallow the appellant’s input tax claim on an invoice for the sale of machinery from Nowelle Ltd t/a Graf (“Nowelle”) to the appellant.

2. The Respondents argue that the sale of machinery to the appellant was a supply to a person to whom Nowelle had transferred its business as a going concern. Under Article 5 of the VAT (Special Provisions) Order 1995 the purchase cannot therefore be treated as a supply of goods.

3. The appellant says there was no transfer of business as a going concern between Nowelle and itself. There was simply a transfer of the machinery.

Evidence

4. We had before us a bundle of documents. This included correspondence between the parties, the invoice relating to the machinery, VAT forms in relation to the appellant and Nowelle, PAYE End of Year returns showing staff employed for the appellant and Nowelle, details of equipment leased by the appellant from HSBC, and bank statements of Harlequin Design (London) Limited (“Harlequin”), a company who had controllers in common with the appellant and which was also a customer of Nowelle and the appellant. At the hearing we also received copies of draft accounts for Nowelle for the period ended 6 May 2011 and a copy of the Statement of Affairs on the 23 June 2011 being the date of the resolution winding up Nowelle.

5. For the appellant we heard oral evidence from Mr Moss in the course of his submissions. HMRC were able to ask cross examine this and the Tribunal asked further questions. Mr Moss is a partner in Kingswood Chartered Accountants the accountants who acted for Nowelle and the appellant as well as other associated companies. As well as assisting with payroll he gave accountancy advice to the various companies.

6. For the Respondents we heard oral evidence from Mr Shawn Dhaliwal, the HMRC Officer who issued the decision letter of 26 September 2011 against which the appellant appealed. Mr Moss was able to ask questions in cross examination on this evidence.

Law

7. Section 5(3)(c) of the VAT Act 1994 enables the Treasury to provide by order with respect to any description of transaction that it is to be treated as neither a supply of goods nor a supply of services.

8. Article 5 of the VAT (Special Provisions) Order 1995 which is made under that power provides as follows:

5—

(1) Subject to paragraph (2) below, there shall be treated as neither a supply of goods nor a supply of services the following supplies by a person of assets of his business—

(a) their supply to a person to whom he transfers his business as a going concern where—

(i) the assets are to be used by the transferee in carrying on the same kind of business, whether or not as part of any existing business, as that carried on by the transferor, and

(ii) in a case where the transferor is a taxable person, the transferee is already, or immediately becomes as a result of the transfer, a taxable person…;

(b) their supply to a person to whom he transfers part of his business as a going concern where—

(i) that part is capable of separate operation,

(ii) the assets are to be used by the transferee in carrying on the same kind of business, whether or not as part of any existing business, as that carried on by the transferor in relation to that part, and

(iii) in a case where the transferor is a taxable person, the transferee is already, or immediately becomes as a result of the transfer, a taxable person…”

Cases

9. We were referred to:

Kenmir v Frizzell & Others [1968] 1 All ER 414

Background and Facts

10. Background facts relating to the appellant’s application for VAT registration and the procedural history to the appeal were agreed between the parties and where relevant have been included within our findings of fact.

11. We found both the witnesses Mr Moss and Mr Dhaliwal to be credible. In evaluating Mr Moss’s evidence we took into account that he was an advisor to the company rather than someone who made business decisions for it. Direct evidence about the operation of the business and its business decisions would have been preferable but no directors or managers from the appellant or the seller Nowelle attended. Nevertheless we were able to make relevant findings of fact on the basis of Mr Moss’s evidence. It was clear to us he had a close and ongoing professional relationship with the companies. He was knowledgeable about the business operation of Nowelle, the appellant and the other associated companies and was aware of the rationale for their strategic business decisions.

12. There was no significant disagreement between the parties as to the factual circumstances surrounding the sale of the machinery and equipment. The issue between the parties was whether the circumstances amounted to a transfer of business as a going concern for the purposes of the relevant legislation. From the documentary evidence before us and the evidence of Mr Moss and Mr Dhaliwal we found the following.

13. The input tax which is the subject of this appeal relates to assets sold by Nowelle to the appellant on 4 May 2011. It is necessary to set out the background to the seller and buyer of the assets and to explain what activities each were carrying out around the time of the sale of the assets.

The seller - Nowelle

14. Nowelle was incorporated on 30 November 2005. Its business was printing and in particular it serviced retailers providing them with large format and high quality banners advertising sales and promotions. Its customers included Selfridges and Marks & Spencers. Printing was digitised and different printers were needed to produce the different sizes of materials. The company employed staff who were skilled in operating the machines and also staff who involved in boxing / packaging materials and carrying out administration.

15. The company was registered for VAT on 22 March 2006. Its business address was Unit 6, IO Centre, Hatfield, AL10 9EW.

The run-up to sale – state of business / invoices

16. Nowelle was profitable in the years 2006 to 2009 however the change in economic climate resulted in fewer orders and in 2010 the company started to make losses. In 2011 the director was concerned that the business was running into difficulties. Trading in January to March of the year was weak and in late April there was a concern that the company was not going to be able to pay its debts as they fell due.

17. We noted the following from the schedule of output tax in the bundle for the period 1 April 2011 to 6 May 2011.

18. The turnover was in the region of £16/17,000.

19. As well as the sale of the machinery on 4 May 2011 which is the subject of the input tax claim which is the subject of this appeal the next most significant sum at £11,481 was an invoice dated 30 April 2011 for “jobs for the month – april 2011”. Mr Moss explained this related to work invoiced to Harlequin. There was also a sum of £3,241.40 for work done for the retailer Hackett and some much smaller sums for work done for Ralph Lauren. Those invoices were also dated 30 April 2011.

20. Mr Moss told us the Harlequin invoice was reflective of previous invoices that would have been issued to Harlequin. He thought the jobs referred to on the invoice would have most likely been done during the period of the month. Nowelle’s practice was generally to invoice for jobs towards the end of the month.

21. The schedule of output tax also records for 4 May 2005 an amount of £1,000 in respect of “Sale of Stock as agreed at close of business today.”

22. No significant business activity was undertaken by Nowelle in May 2011 and on 23 June 2011 a resolution was passed winding up Nowelle.

The buyer – HQ Graphics Limited

23. Mr Moss told us the perception was that Nowelle had run into difficulties because of the significant labour costs associated with larger print runs. The business owners wanted to have a business which was less labour intensive, did smaller print runs and tenders on line.

24. HQ Graphics was incorporated on 14 April 2011.

25. A Form VAT 1 Application for Registration to HMRC signed 21 April 2011 by Mr Derek Wallis, director the appellant was received by HMRC on 3 May 2011.

26. The VAT 1 showed its business address was stated as being 4^th Floor, 26/27 Great Sutton Street, London EC1V 0DS. It was a voluntary registration with the appellant intending to make taxable supplies. The registration was requested to start on 14 April 2011.

27. The business activities were shown as “retail point of sale printed materials.”

28. The Director’s details were shown as Derek John Wallis.

29. Mr Wallis stated he was also director of six other companies of which one was Nowelle. He resigned as a director of Nowelle on 16 February 2011.

30. The registration date for the appellant was 14 April 2011 with a VAT registration number of 111 5842 25.

31. The VAT application for registration put a figure of £600,000 as a turnover estimate. Mr Moss thought this had been worked out using estimates of the production capacity of the machinery and then adding a small profit.

32. The appellant started business from when it acquired the machines in May 2011.

Customer base for this type of print business

33. There was no particular loyalty among customers. The firm might be used for some work but not others. It would depend on who the marketing team at the retailer chose to use and the print company putting themselves up in front of buying agents. It was the sort of business where you were only as good as your last job.

Common ownership / control of seller and buyer

34. Both Nowelle and the appellant had a common shareholder, Mr Derek Wallis. Mr Wallis owned the appellant, and also had 70% of the ordinary shares of Nowelle, the remaining 30% being held by Mr Stephen Woodley.

35. Mr Wallis was a director of Nowelle up until his resignation on 16 February 2011.

36. Mr Wallis was also involved in a number of other companies, one of which was Harlequin. Harlequin was a customer of Nowelle and then became a customer of the appellant.

37. The business premises of Nowelle and subsequently the appellant were owned by Harlequin Holdings Ltd.

Other equipment leased to HSBC

38. On 6 May 2011 the appellant entered into an equipment leasing agreement with HSBC for various pieces of equipment including cutting machines / guillotines and printers. The cash price of the goods was £181,025.63. This equipment was previously used by Nowelle who leased the assets through HSBC as well.

Premises

39. Nowelle operated from premises in Hatfield. It was a tenant of Harlequin Holdings Ltd who was the freeholder. The premises were on the market for sale with vacant possession. Nowelle had made plans to use premises in Welwyn Garden City. The buyer for the Hatfield premises withdrew. The appellant decided to use the Hatfield premises rather than incur the costs of relocating to Welwyn Garden City and having to kit out and develop the new site. Mr Moss estimated these costs to be in the region of £50-100,000.

40. The appellant was invoiced for rent from Harlequin Holdings on 30 May 2011.

The sale of the machinery and equipment

41. The invoice from Nowelle to the appellant dated 4 May 2011 was for £78,000 with VAT included of £13,000. The appeal relates to HMRC’s decision to reduce the appellant’s claim for input tax for the period 06/11 by £13,000 on the basis that that there had been a transfer of a going concern between Nowelle and the appellant.

42. The invoice was headed “Sale of Machinery”. The assets specified were various printers including a number of “hp Designjet 5500” printers, and a “Vutek PV UV 320” printer. The invoice also referred to “other assets, office equipment, computers, printers and racking as agreed which included “various Apple Mac Computers, Accessories & Software.”

Employees

43. A number of employees of Nowelle and subsequently the appellant had specialist knowledge / skills in operating the printing machines. There were also employees whose job it was to box and distribute the product and to carry out administration.

44. Nowelle had 21 employees as at 5 April 2011. All 21 of these employees are shown as starting at the appellant on 9 May 2011. In addition Mr D Wallis ended his employment with Nowelle on 31 March 2011 and started at the appellant on 9 May 2011.

45. Out of the 22 employees (the 21 employees plus Mr Wallis) 7 were shown as starting on 9 May 2011 but also finishing on 9 May 2011. The records do not show the date the employees left Nowelle but the longest the gap could be is 5 April 2011 to 9 May 2011.

46. Out of the 22 employees who worked for Nowelle from end March/ early April 2011, 15 of them became employees of the appellant.

47. After 9 May 2011, 5 employees left the appellant. In 2011/12 the appellant employed 4 additional employees to those who started on 9 May 2011. The earliest new hire by the appellant following the tranche of employees who started on 9 May 2011 was 1 August 2011.

48. There was no formal agreement between the companies or between the staff members of Nowelle and the appellant that they would be transferred to the appellant.

The appellant’s business after the sale

49. Bank accounts for the period May to July 2011 of the appellant show a small amount of transactions in May 2011 and then significantly more in June and July of 2011. Amounts of salary were paid to employees in June 2011. Several inflows of large amounts came in from Harlequin – it is not clear to what extent this was for work done or whether it represented transfer of funding. The appellant was making purchases of supplies from at least as early as 8 June 2011.

Procedural history of this matter

50. On 28 July 2011 the appellant submitted its first VAT return for the period 06/11 (from 14 April 2011 to 30 June 2011).

51. HMRC undertook a check of the return on the basis that it was a first period repayment return of £25,752.67.

52. Following the submission by the appellant of the requested information (the 10 largest VAT bearing invoices and bank statements), the information was considered by Officer Shawn Dhaliwal.

53. By letter dated 17 August 2011 Officer Dhaliwal set out his contentions regarding certain transactions. Consequently in relation to the invoice number GRI 4171 from Nowelle Ltd dated 4 May 2011 for £78,000 with VAT included of £13,000, Officer Dhaliwal reduced the original claim by £13,000.

54. By e-mail dated 6 September 2011 the appellant confirmed their business address was Unit 6 the IO Centre, Hearle Way, Hatfield, Hertfordshire, AL10 9EW. They stated that at the time of registering for VAT they were relocating and had used the business address of Harlequin as it was a company sharing common control with the appellant.

55. By letter dated 26 September 2011 HMRC advised the appellant of the amounts by which the VAT return for period 06/11 would be amended. The revised repayment to the Appellant was reduced from £25,752.67 to £12,752.67.

56. By letter dated 12 January 2012, Officer Hanrahan of HMRC wrote to the appellant upholding the decision that there had been a transfer of going concern and agreeing the claim was to be reduced. Officer Hanrahan contended that the conditions in VAT (Special Provisions) Order 1995 Article 5 had been met in that the appellant had many of the same customers and traded from the same premises. It was carrying on similar work, staff previously employed by Nowelle were now employed by the appellant and the director was previously a director of Nowelle.

57. The appellant’s representative, Kingswood submitted an appeal to the Tribunal dated 2 February 2012.

Appellant’s arguments

58. The invoice was raised by Nowelle in good faith and without any objective other than to properly transfer ownership of certain assets from one entity to another and properly account for the VAT due on the sale of these assets.

59. The assets sold were a mixture of various types of equipment which in themselves were not principally directly involved in the operation of a printing company but form part of a series of assets that only if used with other assets would allow an entity acquiring them to undertake the business of printing. These assets did not constitute all the assets owned by Nowelle Ltd.

60. There was no sale of the business of Nowelle Ltd to the appellant and there was no sale and purchase agreement written or otherwise.

61. There was no disposal of goodwill by Nowelle Ltd to the appellant.

62. There was no parallel share structure or Board of Directors.

63. Any common customers as between the appellant and Nowelle arose out of the common control. Nowelle had other customers who did not transfer across to the appellant.

64. There was the transfer of employees but not all employees were eventually retained.

65. The fact that the appellant operated out of the same premises as Nowelle Ltd arose for reasons totally unconnected with the sale of assets by Nowelle Ltd to the appellant (profitability, cash flow, loss in terms of time, inconvenience and relocation costs).

66. HMRC were wrong to conclude the circumstances surrounding the demise of Nowelle Ltd gave rise to a transfer of a business as a going concern. While substance over form type arguments may be relevant where transactions have the sole purpose of avoiding tax there was no intention to avoid tax here, on the contrary subject to the liquidator of Nowelle Ltd submitting outstanding information to HMRC, HMRC should fully recover all tax due by Nowelle.

67. Nowelle Ltd properly accounted for the output tax of £13,000 on its sales invoice and this is included in the total output tax of £29,401.60. The unpaid VAT of Nowelle Ltd is £9,314.90 and in total £10,028.91 when the unpaid VAT for the quarter ended 31 March 2011 is included. On any equitable approach it is inappropriate for HMRC to disallow the full £13,000 and in the first instance any reduction should be limited to £9,314.90 but more reasonably taking account of all the unpaid VAT to £10,029.

68. Once the liquidator of Nowelle Ltd has submitted corporation tax computations to HMRC for year ended 31 December 2010 and the period ended 6 May 2011 HMRC will be able to offset the VAT apparently still due against the repaid corporation tax under s130 Finance Act 2008. In their Notice 700/9 HMRC say the main purpose of the TOGC rules is to:

“Protect Government revenue by removing a charge to tax and entitlement to input tax where the output tax may not be paid to HMRC. For example where a business charges tax which is claimed as input tax by the new business but never declared or paid by the old business.”

69. The input tax claim of £13,000 should be allowed to stand as otherwise HMRC will have benefited from unjust enrichment.

70. The Kenmir case is not relevant as it is an employment case dealing with employment legislation.

71. In relation to burden of proof it is HMRC’s responsibility to provide evidence to support their case as it was their decision in the first place to disallow the repayment claim by the appellant. HMRC have not provided any factual evidence in support of their position. The appellant’s case is made more difficult because it is difficult to produce evidence that something was not there e.g. that there was no agreement.

Respondents’ arguments

72. The term “going concern” has the meaning that at the point in time to which the description applies the business is live or operating and has all parts and function necessary to keep it in operation as distinct from it being only an inert aggregation of assets.

73. Businesses which are experiencing difficult trading problems can still be a going concern and this applies to Nowelle.

74. Case law establishes that the key approach is to look at the overall effect of what has happened. Kenmir stresses the need to take all factors into account. Individual factors are taken together as a whole, not looked at independently.

75. The following indicators support HMRC’s decision;

(1) The business continued to be run from the same premises.

(2) There were common customers in that Harlequin was the major customer,

(3) There was a very close relationship between the two companies in that Derek Wallis was a director of Nowelle Ltd although resigning on 16 February 2011 he remained as Company Secretary. As at the date of completing the VAT Registration for the appellant (21 April 2011) he indicated he was director of the company.

(4) The vast majority of the staff employed by Nowelle during the year ended 5 April 2011 were shown to be employees of the appellant for the year ended 5 April 2012 which was the year the appellant commenced trading.

(5) Equipment previously used by Nowelle was subsequently leased to the appellant through HSBC thus enabling the appellant to continue in the same type of business as Nowelle.

76. The supply of the machinery put the appellant in possession of an identifiable business; it had the equipment to carry on the business. The appellant intended to use the assets for carrying on the same kind of business. The effect of the transfer being to put the appellant in possession of a business which could be operated as such.

77. It is not necessary for jobs or contracts to be transferred or for there to be a contract of sale, or purchase of goodwill in order for there to be a transfer of a going concern.

78. While there may not have been the intention to trade from the same premises the appellant did and still does trade from the same premises as previously used by Nowelle Ltd.

79. The output tax due from Nowelle has not been paid and therefore the concessionary treatment that HMRC might have otherwise been able to give did not apply. HMRC could consider this concession if the output tax was subsequently paid but as at the date of the hearing was not in position to do so.

80. The burden of proof lies with the appellant to show there had been a supply between Nowelle and the appellant and that the supply was not part of a transfer of a business as a going concern.

Discussion

Issue for determination under Article 5 of the VAT (Special Provisions) Order 1995 (“the 1995 Order”)

81. On the basis of the parties’ submissions and the evidence before us much of the requirements of the 1995 Order are not in issue.

82. The supply of machinery and equipment by Nowelle to the appellant on 4 May 2011 was a supply of assets of Nowelle’s business within the meaning of the relevant provision. The assets were assets which were to be to be used by the appellant “in carrying on the same kind of business…as that carried on by the transferor” or the same kind of business as that carried on by the transferor in relation to the part transferred. Nowelle and the appellant were both engaged in printing for retailers. Mr Moss mentioned it was the intention of the appellant to have smaller print runs in order to reduce labour costs but this is a matter of scale and does not affect our view that the appellant was engaged in the same kind of business as Nowelle. This was a case where the transferor, Nowelle, was a taxable person, and that being so, the appellant, as the transferee, satisfied the condition that it was already a taxable person having become registered from 14 April 2011.

83. The key issue for our consideration was whether under article 5(1)(a) of the 1995 Order the supply of assets to the appellant was a supply “to a person to whom [Nowelle] transfers [its] business as a going concern”.

84. If the whole of Nowelle’s business was not transferred, then article 5(1)(b) also needs to be considered i.e. whether the supply of assets to the appellant was supply “to a person to whom [Nowelle] transfers part of [its] business as a going concern”. For article 5(1)(b) to apply the part of the business transferred needs to be capable of separate operation.

85. The legislation does not provide a definition of what is meant by “transfers his business as a going concern”. HMRC refer the High Court decision in Kenmir which set out the matters to be considered in answering the question of what amounted to a transfer of business as follows:

“(page 335) In deciding whether a transaction amounted to the transfer of a business regard must be had to its substance rather than its form….In the end the vital consideration is whether the effect of the transaction was to put the transferee in possession of a going concern the activities of which he could carry on without interruption…the absence of [an assignment of goodwill] is not conclusive if the transferee has effectively deprived himself of the power to compete. The absence of an assignment of the premises, stock-in-trade or outstanding contracts will likewise not be conclusive, if the particular circumstances of the transferee nevertheless enable him to carry on substantially the same business as before.”

86. Mr Moss argued this was not of relevance because it related to particular employment legislation.

Is Kenmir restricted to the context of employment law?

87. Kenmir was indeed an employment law case. The particular statutory provisions in issue were s1 and para 1 Schedule 1 of the Redundancy Payments Act 1965 and Schedule 1 of the Contracts of Employment 1963, paragraph 10(2) of which provided:

“If a trade or business or an undertaking…is transferred from one person to another, the period of employment of an employee in the trade or business or undertaking at the time of the transfer shall count as a period of employment with the transferee and the transfer shall not break the continuity of the employment”

88. Looking at the judgment of Widgery J in the case it can certainly be seen that in relation to his consideration of the significance of there being a lack of transfer of goodwill his reasoning is developed by reference to the aim of the particular employment legislation at issue:

“Schedule 1 to the Act of 1963 is concerned with continuity of employment and uses the phrase “transfer of business” to describe a situation which a change of employer should not be regarded as a break in the continuity of employees’ engagements. If a business has no goodwill because it is at a low ebb, or because it sells all its production to an associated company, the factory premises might be sold and all the activities of production transferred to the new owner without interruption; yet if counsel’s argument is right, the employees’ accrued rights under the Acts of 1963 and 1965 would be lost unless the transfer included a formal empty phrase purporting to include goodwill.”

89. But, the propositions set out in the excerpt at [85] above that regard must be had to substance rather than form, and whether the effect of the transaction was to put the transferee in possession of a going concern, the non-conclusive nature of the factors mentioned, and the question of whether the activities of the going concern could be carried on without interruption can, and has, been applied more widely.

90. There are a number of decisions of the VAT Tribunal and of this Tribunal ( of which Mark Young t/a The St Helens [2012] UKFTT 702 (TC) and Brenda Massey t/a The Basement Restaurant [2012] UKFTT 102 (TC) are relatively recent examples) which apply the propositions set out in Kenmir to the context of VAT. The relevant propositions in Kenmir were also endorsed at High Court level in the case of Customs and Excise Commissioners v Dearwood Ltd. [1986] STC 327 which considered whether there had been a transfer of business as a going concern in the context of Regulation 12(1) of the Value Added Tax (Special Provisions) Order 1981 which in so far as relevant to the issue here contained identical wording to the 1995 Order. It is not correct therefore to see the propositions set out in Kenmir as only confined to the context of employment law.