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United Kingdom VAT & Duties Tribunals Decisions

You are here: BAILII >> Databases >> United Kingdom VAT & Duties Tribunals Decisions >> Dartford Borough Council v Revenue & Customs Rev 1 [2007] UKVAT V20423 (06 November 2007)
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Cite as: [2007] UKVAT V20423
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Dartford Borough Council v Revenue & Customs [2007] UKVAT V20423 (06 November 2007)
    20423
    TRANSFER OF A GOING CONCERN – local authority entering into development agreement and agreement for lease with a tenant and then selling freehold interest – whether business of purchaser different – no – appeal allowed

    LONDON TRIBUNAL CENTRE

    DARTFORD BOROUGH COUNCIL Appellant

    - and -

    THE COMMISSIONERS FOR HER MAJESTY'S

    REVENUE AND CUSTOMS Respondents

    Tribunal: DR JOHN F AVERY JONES CBE (Chairman)

    PRAFUL DAVDA FCA

    Sitting in public in London on 15 October 2007

    Oliver Jarratt, Deloitte & Touche LLP, for the Appellant

    Sarabjit Singh, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents

    © CROWN COPYRIGHT 2007

     
    DECISION
  1. This is an appeal by Dartford Borough Council against a decision letter of 22 March 2006 that the sale of plots 1 and 37 ("the Plots") of The Bridge at Dartford was not the transfer of a going concern. This decision resulted in an assessment to VAT of £4,303,845 made on 16 May 2006. The decision was upheld on reconsideration on 1 September 2006. The Appellant was represented by Mr Oliver Jarratt, and Customs by Mr Sarabjit Singh.

  2. The issue is accordingly whether the sale by the Appellant of the Plots was the transfer of a going concern.

  3. We heard evidence from Mr R J Webb, Vice-President in the Project Management sector of Prologis Developments Ltd ("Prologis") and we find the following facts:

    4. (1) The Appellant owned land on which an option to tax had been made at The Bridge in Dartford, Kent ("the Site").
    (2) The Appellant entered into the following agreements:
    (a) 30 January 2003. Development Agreement with Prologis to develop the Site. The Agreement states that it was intended to govern the master planning, marketing, development and disposal of the whole site in accordance with the Appellant's obligations to obtain the best consideration from a disposal by it of the Site. In the Agreement "disposal" is defined to include transfer of the freehold and granting leases and other dealings in any interest in the Site. Prologis was granted the right to require the Appellant to dispose of plots by joining in the contract for their disposal. This is subject to the Appellant not being required to dispose of a plot unless it is satisfied that the purchaser intends to commence and complete construction thereon without delay. The Agreement provides for the Appellant to be paid a drawdown payment of £100,000 per acre for the time between Prologis entering a plot to commence development works and the disposal (as defined) of the plot. The Agreement was conditional on planning permission, highways agreements, planning agreements and a number of other conditions. The Agreement was assignable by the Appellant but not by Prologis. The Site was developed on a section by section basis.
    (b) 17 November 2004. The Appellant and Prologis entered into a conditional Agreement for Lease of the Plots with Sainsbury's Supermarkets Limited ("Sainsbury's") for a distribution warehouse to be constructed on plot 1, and maintenance and recycling units on plot 37. It provides for leases (drafts of which are attached) to be executed and held in escrow conditional on practical completion and for the term of the leases to start on practical completion, which was later scheduled to be on 12 April 2007. The Agreement sets out the rent and provides for an adjustment to the stated rent if the gross internal area of the distribution building is more or less than 581,973 square feet, and if the gross internal area of the maintenance and recycling units are is more or less than 10,748 square feet for the former or 92,655 square feet for the latter. Sainsbury's were closely involved in the specifications for the buildings and the development, including making a change in the building contractor.
    (c) 5 August 2005. The Agreement for Lease became unconditional on the Appellant, Prologis and Sainsbury's agreeing that the conditions in the Agreement for Lease were satisfied or deemed to be satisfied.
    (d) 21 December 2005. The Appellant agreed to sell the freehold of the Plots subject to the Agreement for Lease to GP Nominees Limited ("GP") which was not acting as a nominee. The Agreement states that the parties considered that the sale was the transfer of a going concern and contains provisions for obtaining Customs' agreement. There is a warranty that GP has a fixed intention to continue to let the property immediately after completion on the terms of the Agreement for Lease and not to carry on a business different in any way from that currently carried on by the Appellant. The sale was completed on 29 December 2005.
    (e) 29 December 2005. Development and Funding Agreement between GP, Prologis and the Appellant. The Appellant had little involvement in this agreement except that it was agreed that the Appellant had no liability or obligation in relation to any works to be carried out by Prologis; the Appellant confirmed that it had not claimed any capital allowances.
    (3) By 21 December 2005 only development on the Site that had been completed was of plot 12. The work performed on the Plots consisted of trapping about 500 lizards as required by English Nature and the Environment Agency at a cost of £37,000; the removal of two electricity pylons and overhead wires on plot 37 at a cost of £1m; infilling of a watercourse running across plot 1 with stone material which also involved catching about 200 water voles at a cost of £37,000; the acquisition of a privately-owned road that ran across a corner of plot 1 where the distribution centre was to be constructed and the construction of a new road running between plots 1 and 37 and serving as access to both plots, including the grant of an easement to the owner of the old road (no figure is given for this expenditure and presumably it forms part of the development costs); and work was in progress from September 2005 to bring connection points of relevant utilities to plots 1 and 37. Little work had been done on the other plots. The Appellant in a letter to Customs of 30 June 2006 stated that the total paid to Alfred McAlpine Capital Projects Limited in respect of works to the Site at that date was £13.4m of which they attributed £1,055,584 (£1m for the power lines plus some drainage and ecology and unexploded bomb survey works) directly to the Plots and 50 per cent of a number of other items relating to the remainder of the Site, total £7.76m. Mr Webb approved this breakdown. The basis on which 50 per cent of the other expenditure is attributed to the Plots seems somewhat arbitrary to us, although we accept that it is necessary to attribute some expenditure on the whole Site such as utility services. We are therefore unable to put a figure on the amount. We find that some works had been carried out on the Plots but these could be described as enabling works rather than actual development works.
    (4) Also by 21 December 2005 various agreements had been made relating to the Site without which development of the Plots would not have been permitted. These included a compulsory purchase order relating to a different part of the Site; a s 106 of the Town and Country Planning Act 1990 agreement relating to the obligation to build affordable housing elsewhere on the Site; a s 106 agreement relating to a Fastrack bus service (which used the new road between the Plots); a s 278 of the Highways Act 1980 agreement relating to laying of 10 miles of new roads and a new bridge; and planning permission had been granted for the Site.
  4. Article 5 of the VAT (Special Provisions) Order 1995 provides:

    5. "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—
    …
    (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 or a person defined as such in section 3(1) of the Manx Act."
    (It is common ground that para (2) is satisfied.)

    Section 84(10) of the VAT Act 1994 provides:

    "(10) Where an appeal is against a decision of the Commissioners which depended upon a prior decision taken by them in relation to the appellant, the fact that the prior decision is not within section 83 shall not prevent the tribunal from allowing the appeal on the ground that it would have allowed an appeal against the prior decision."
  5. Mr Jarratt for the Appellant contends in outline:

    6. (1) The Appellant carried on business on the Plots and GP necessarily stands in its shoes following the sale to it and so must be carrying on business of the same kind. The fact that the sale is subject to the Agreement for Lease is sufficient to constitute the transfer of a going concern. The level of development then carried out is irrelevant.
    (2) Alternatively, the extent of the development works that had then taken place on the plots coupled with the Agreement for Lease mean that the sale must be the transfer of a going concern.
    (3) Alternatively, the situation is within Customs' published guidance in para 7.2 of Notice 700/9 that "if you…own a property and have found a tenant but not actually entered into a lease agreement when you transfer the property to a third party (with the benefit of the prospective tenancy but before a lease has been signed), there is sufficient evidence of intended economic activity for there to be a property rental business capable of being transferred." Since Customs' must have made a prior decision that the situation was not within such guidance, such decision is within the Tribunal's jurisdiction by virtue of s 84(10) of the VAT Act 1994.
    (4) In deciding whether there is a transfer of a going concern regard must be had to the substance rather than the form and consideration must be given to the whole of the circumstances (Kenmir v Frizzell [1968] 1 All ER 414 at 418). The expression has a uniform meaning throughout the Community (Zita Modes Case C-497/01). The ECJ stated at [45] that "nothing in art 5(8) of the Sixth Directive requires that the transferee pursue prior to the transfer the same type of economic activity as the transferor." The requirement of UK law that the type of business should be the same was in breach of Community law. The intention of the parties is a relevant factor in deciding whether there is the transfer of a going concern (Royal Bank of Scotland plc (2002) VAT Decision 17637 at p.14). There was no implication that taxable supplies must have been made before a transfer as a going concern (Hordern v Customs and Excise Commissioners (1992) VAT Decision 8941).
  6. Mr Singh for Customs contends in outline:

    7. (1) The sale was not the transfer of a going concern because the land was not "to be used by the transferee in carrying on the same kind of business…as that carried on by the transferor." The Appellant always intended to sell the Plots and never intended to hold the Plots and receive rent, whereas GP intended to hold the Plots and receive rent from them. The numerous references to disposal in the Development Agreement shows that the Appellant intended to dispose of its freehold interest in Plots.
    (2) The test in Kenmir v Frizzell of whether the transferee could carry on the business without interruption was not the whole story because art.5(1)(b)(ii) of the 1995 Order requires that the assets "are to be used" by the transferee in carrying on the same kind of business, thus requiring an intention to do so. As the ECJ stated in Zita Modes at [46] "the transferee must however intend 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." With regard to the ECJ's statement that the type of business need not be the same as the transferor's, art 5(8) of the Sixth Directive merely gives states the right to consider that there is no supply and it also provides that states may take the necessary measures to prevent distortion of competition in cases where the recipient is not wholly liable to tax. The Appellant cannot rely on the Directive.
    (3) For there to be a going concern there must be actual development taking place. The reason why the Tribunal decided that there was no business in Gulf Trading and Management Limited v Customs and Excise Commissioners (2000) VAT Decision 16847 was that the only action taken in respect of the land was an inspection of the soil, drawings for planning permission were submitted, and a fence was put up round the plot. By contrast in The Golden Oak Partnership v Customs and Excise Commissioners (1992) VAT Decision 7212 infrastructure works had been carried out including the construction of a road and driveway, an electricity substation, a gas meter station, an underground sewerage pumping station, and piping from the pumping station to the public sewers, which meant that the land was in course of active development.
    (4) On the Appellant's third argument, there was no prior decision that Customs' guidance was not satisfied, but only a decision that there was no transfer of a going concern. Accordingly any point on Customs' guidance was outside the jurisdiction of the Tribunal.
    Reasons for our decision
  7. It is common ground that at the time of sale the Appellant was carrying on an economic activity in relation to the Plots. It is not necessary to give such activity a name and in our view considerable confusion has been caused by the Appellant's claim that it was a rental business, and Customs' contention that it was only a future rental business. But the nature of the business is that there was a contract with Prologis under which the Site would be developed and an Agreement for Lease with Sainsbury's that bound the parties to lease the completed buildings on the Plots to Sainsbury's. The question for us is whether that business included an intention to sell the Plots before rent was payable on completion of the building and if so, whether it was a different business from GP's which intended to hold the Plots and receive rent from them.

  8. We did not hear any evidence of the Appellant's intention and so this must be ascertained from the documents. The Development Agreement provides for a "disposal" of the Plots but that expression is defined to include the grant of leases, and so that agreement cannot be construed as providing for a disposal of the freehold. Indeed the intention seems to be that the parties will continue to hold the Site and split any surplus money, and for the Appellant to receive the drawdown payment of £100,000 per acre. There was nothing in the Development Agreement that meant that the Appellant was bound to sell, or even likely to sell, its interest in the Plots. When the Agreement for Lease with Sainsbury's became unconditional, the sale became a viable option because it meant that a fund would be willing to purchase but there is nothing in the agreements to suggest that a sale was necessarily intended. In correspondence the Appellant stated that Prologis had proposed that the transaction relating to the Plots take the form of a "full forward funding where the land in question is transferred to a purchaser prior to practical completion" but had a buyer not been found the Appellant would have remained as lessor. Although the Appellant did not give evidence, there is no reason to doubt this statement which accords with the documents. Accordingly, we find as a fact that the Appellant did not have the intention of disposing of its interests in the Plots before completion of the buildings and the receipt of rent.

  9. On this basis, the Plots were to be used by GP in carrying on the same type of business as the Appellant and accordingly there was a transfer of a going concern. We consider that the parties were right in including in the warranty in the sale agreement that GP has a fixed intention to continue to let the property immediately after completion on the terms of the Agreement for Lease and not to carry on a business different in any way from that currently carried on by the Appellant.

  10. We should add that even if we had decided on the facts that the Appellant intended to sell its interests in the Plots before completion of the buildings on them we would still have considered that (assuming GP intended to hold its interest and receive rent) there would still have been a transfer of a going concern. We consider that the current receipt of rent in circumstances where there is an Agreement for Lease is irrelevant to the type of business. We also consider that the intention to sell a business is something different in nature from the kind of business, particularly as in every case in which they might be the transfer of a going concern there will necessarily be a sale. Taken to its logical conclusion, Mr Singh's argument is that a dealer in land can never make a transfer of a going concern to an investor before actual development takes place, which must be a common transaction. If Customs consider that this distinction means that the kind of business is different, when the difference between a dealer and an investor is not one relevant to VAT, we consider that they should have made a public statement that they were proposing to change their practice, as we do not think that this has been their practice in the past.

  11. It is not necessary to decide on the Appellant's second argument that sufficient development had taken place on the Plots which when coupled with the Agreement for Lease meant that there was the transfer of a going concern. Once the Development Agreement and Agreement for Lease were in place we do not consider the amount of physical development at the time of the transfer to be relevant. It is true that in The Golden Oak Partnership the Tribunal disagreed with Customs' contention that there could not be a business before supplies were made, on the basis that the land was in the course of active development, but that reflects the facts of the case that infrastructure works had been carried out. In that case the sale was to a developer and the seller had not contracted for any development.

  12. Nor is it necessary to decide on the Appellant's third argument that we can consider whether the situation is within Customs' published guidance in view of s 84(10). However, in Customs and Excise Commissioners v Arnold [1996] STC 1271 Hidden J said at 1281 that the matter on which the Tribunal had jurisdiction must depend on the prior decision in such a way that the legal basis for the disputed decision must have been determined by the prior decision or be a necessary consequence of it. It must be a distinct decision and not a part of the reasoning on which the disputed decision was made. Here we can see no prior decision that Customs made, or needed to make, before deciding that there was no transfer of a going concern.

  13. Mr Jarratt asked for costs on an indemnity basis. We gave this serious consideration but concluded that this was not a case in which we should award costs other than on the standard basis. Mr Singh put forward a serious argument, although one we have rejected.

  14. We are, however, concerned about Customs' misunderstanding about the nature of an agreement for lease which we believe is the cause of the appeal. The disclosed document recording the reconsideration decision said:

    15. "a formal lease agreement has not yet been signed but a prospective tenant is in place and they are contractually committed to the tenancy. If a formal lease agreement had not yet been signed now does the contractual commitment work? A binding agreement is not a formal lease."

    Customs' Statement of Case contains the following contentions (para 26 is essentially a repeat of the conclusion in the reconsideration letter of 1 September 2006):

    "18. The Commissioners contend that as the buildings did not exist at the time of the agreement with Sainsbury's, it is a statement of intent to lease. The Commissioners further contend that the sale of land with an agreement to a future lease of a property that is yet to be constructed, does not amount to a TOGC.
    19. The Appellant did not have an existing property rental business on plots 1 and 37 but has merely sold the land that may in future become a property rental business for the new owner. If order for this to be regarded as the transfer of a property rental business, there had to be a property to transfer and not just an area of land with an intention for a property to be constructed. This was not the case in this matter.
    [20 to 24 deal with the work then carried out on the Plots]
    25. The Appellant has stated that the intention of the council under the Development agreement was to ensure that the development as a whole was built out as soon as practicable and not merely 'landbanked' by the developer and at the same time to obtain the best consideration that could reasonably be obtained for the disposal of the property. The Commissioners therefore contend that it was not the Appellant's intention to become landlords and that the leases have not yet been executed. The Development and Funding Agreement between [GP, Prologis], and the Appellant for both the Distribution and the maintenance and Recycling Lease refers to the proposed leases.
    26. The Commissioners contend that it was the Appellant's intention to put in place agreements which would merely oblige a future purchaser to complete a warehouse as soon as possible and to rent it to Sainsbury or someone else acceptable to the Council. Therefore, what has taken place is a sale of land, albeit land with explicit requirements and restrictions as to its use.
    27. The Commissioners submit that in selling the land the Appellant transferred an asset of its business without also transferring its business as a going concern. The fact that there was a statement of intent to lease does not mean that a property business existed. There has been no evidence that the Appellant had a property development business. To qualify for TOGC, assets must be used by the transferee in carrying on the same kind of business that was carried out on by the Appellant. This did not occur in this matter."
  15. It is clear that the author of these had no idea what an agreement for lease was and thought it was no more than "a statement of intent to lease." The Appellant has been put to a lot of trouble when carrying out a normal transaction in commercial property where one would expect an agreement for lease to be used because of this lack of understanding. We express the hope that Customs will give legal advice to their officers, and to whoever in the Solicitor's Office was responsible for the Statement of Case, of the traditional summary of Walsh v Lonsdale (1882) 21 ChD 9 that "a contract for a lease is as good as a lease," to which we are aware are exceptions but we doubt if any of them is relevant to VAT. We also hope that Customs will clarify the meaning of their guidance of having "found a tenant but not actually entered into a lease agreement when you transfer the property to a third party (with the benefit of the prospective tenancy but before a lease has been signed)," in particular whether it means after an agreement for lease but before the granting of a lease, or even before either a lease is granted or an agreement for lease is made and if the latter, how land can be sold with the benefit of a "prospective tenancy." We have not relied on this as we have no jurisdiction to do so but we find it obscure.

  16. Accordingly we allow the appeal and direct Customs to pay the Appellant's costs of, incidental to, and consequent upon, the appeal on the standard basis to be determined in default of agreement by a Tribunal Chairman. We do not know whether any question arises about interest on the repayment of the VAT presumably paid as a result of the assessment, which would have been paid by GP, and if necessary we give the Appellant liberty to apply within 30 days of the date of release of this decision for an award of interest.

    17. JOHN F AVERY JONES
    CHAIRMAN
    RELEASE DATE: 6 November 2007

    LON/06/993 (amended)

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