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Cite as: [2008] UKVAT V20563

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Nicholas Spence v Revenue & Customs [2008] UKVAT V20563 (01 February 2008)

20563

VAT – Transfer of a going concern – Section 49 VATA 1994 – Assets and premises reverting to landlord on termination of tenancy – The only assets actually transferred being minor – Held: not a transfer of a going concern

LONDON TRIBUNAL CENTRE

NICHOLAS SPENCE Appellant

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents

Tribunal: CHARLES HELLIER (Chairman)

GEORGE MILES

Sitting in public in Bristol on 21 November 2007

Mr Spence in person

Mr Jonathan Holl, instructed by the solicitor to HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2007

DECISION

This appeal concerns whether or not there was a transfer of a business as a going concern for the purposes of section 49 VATA 1994. We have concluded that there was not but we have not found it an easy decision.

Mr Spence is one of the leaseholders of premises at 38 Maiden Road, Weymouth, Dorset. He entered into a licence agreement with a Miss Duke in respect of the ground floor. Miss Duke operated a restaurant there. She ceased to do so on 24 December 2004. On 14 January 2004 Mr Spence opened the doors of the ground floor as a restaurant.

The Respondents say that the transaction was the transfer of a business as a going concern to Mr Spence. As a result they say Mr Spence should have been registered for VAT from 1 January 2005. They notified their decision to register the Appellant for VAT from then to date in a letter dated 9 August 2006. Mr Spence appeals against that decision.

After some prompting from the Respondents' officers Mr Spence made an application (in April 2006) to be registered from November 2005. The Respondents registered him with effect from 1 January 2005. Mr Spence appeals against that registration under s.83(a) VAT Act 1994.

Because Miss Duke's taxable turnover was over the statutory threshold, if there was a transfer of a business as a going concern to Mr Spence in the circumstances of this case then the Respondents are correct and Mr Spence was registrable from 25 December. That is the result of section 49 VATA and Schedule 1 VATA 1994. The question for us was whether there was such a transfer.

The Evidence and our findings of fact

We heard oral evidence from Mr Spence, and from Gordon Lilley and Roger Stedman, two of the Respondents' officers who also produced witness statements. We had various copy documents before us as well. From that evidence we find as follows:-

(1) Mr Spence and another person lease 38 Maiden Road from Mr Peter Evis. The lease was taken in about 2002. Mr Evis had evicted the previous tenant. There were various fittings and chattels in the premises (chairs, tables, fridges, cookers). Mr Spence acquired these from Mr Evis under an agreement under which he paid for them in instalments over three years.

The list of these chattels was produced to us. It is extensive. It includes glasses, fridges, tills, tables, heaters, bar machinery, fryers, ovens, grills, chairs and sound equipment. Mr Spence estimated the total value at £15,000. We think that the replacement cost would be in excess of that figure. But it was clear that these items were the core tangible moveable assets, and most of the accessories needed to run a restaurant.

(2) Mr Spence let out the ground floor of the premises. It appears that he was solely responsible for this. There was a succession of tenants. Miss Duke was the third of these tenants. She went into occupation in October 2003 and paid rent from then to December 2004. In addition to the use of the ground floor, Miss Duke was permitted the use of the chattels described above.

(3) On 1 December 2004 Miss Duke gave notice to terminate her tenancy on 31 December 2004. She shut up shop and vacated the premises on Christmas Eve, 24 December 2004.

(4) While in occupation Miss Duke ran a restaurant under the title "El Mexi.Co" which sold Mexican food. She was registered for VAT and in the period of 12 months prior to 24 December 2004 her VATable supplies exceeded £100,000. She had however found it difficult to make a substantial profit in running the restaurant.

(5) Miss Duke filed a registration for the trade mark "EL-MEXI.CO" in December 2004 in class 43, Restaurant and bar services.

(6) On 24 December 2004 Miss Duke had a meeting with Mr Spence. They discussed a fairly lengthy document which Miss Duke wished Mr Spence to sign. The document included provision for the licensing of the El-Mexi.Co trade mark to Mr Spence (and for the payment for it by Mr Spence). Mr Spence did not wish to make the agreement. Miss Duke was upset. It was Christmas Eve. Mr Spence agreed that he would pay Miss Duke £1,500 for the assets listed in Part 2 of Schedule 2 to the draft agreement. That schedule was removed from the draft and the parties signed it under an inscription:

`Received sum £1,500 for all goods above for full and final settlement of Porthole Restaurant – see licence between HMB Duke + N Spence".

(7) The Christmas spirit left Mr Spence after he had signed. He told us that he had signed and given Miss Duke a cheque because he was sorry for her. But after Christmas he stopped the cheque. Miss Duke's solicitors approached him and the money has now been paid.

(8) The scheduled assets comprised a couple of saucepans, a set of plates, some lamps, two microwaves (which Mr Spence told us did not work) and a chest freezer together with a few other items of little value or significance. By contrast with the items licensed to Miss Duke by Mr Spence these assets were minimal. By no stretch of the imagination were they even the minimum needed to operate a restaurant.

(9) In the corner of the signed schedule appears a manuscript note:

"Trade mark £500

Goodwill £500

£500".

It is possible that this indicated that the Scheduled assets were being assigned for £500, and the goodwill and the trade mark each for £500. That would give a total of £1,500. However the signed receipt makes clear that the £1,500 is `for all goods above for full and final settlement of Porthole Restaurant".

(10) On 24 January 2005 it appears that Miss Duke published a notice in which she indicated that her former landlords were now trading from Miss Duke's former premises and that they had no rights to the name under which they were trading or to use Miss Duke's trade mark. The notice says "Miss Duke is not associated in any way with this new business venture …". The notice indicates however that the landlords purchased her "furniture and decorations".

(11) We conclude, on balance, that the manuscript note referred to in (9) above did not indicate that the trade mark and goodwill were being sold. That was Mr Spence's evidence and it is supported by Miss Duke's actions.

(12) Mr Spence re-opened the restaurant on 14 January. It sold Mexican food. Initially he used the same name and logo for the restaurant and later changed it subtly.

(13) When Miss Duke had been the tenant, the premises had been licensed for the sale of alcoholic beverages. The licensees were Mr Spence, his colleague Mr Taylor and Miss Duke. After 1 January 2005 Miss Duke was removed from the licensees' names.

(14) While Miss Duke ran the restaurant she employed chefs who came and went: she had a front of house manager and cooked and served herself. Mr Spence ran the restaurant himself with help from his family. One young lad did dishwashing for Miss Duke and also worked upstairs in the premises. Mr Spence took him on to help dishwashing in the same role.

(15) The Respondents' officers had recorded Mr Spence as telling them, at a meeting in August 2005, that Mr Spence had purchased Miss Duke's stock. Mr Spence told us that he did not purchase her stock: she took the drink with her. We accept Mr Spence's evidence at this point: it is supported by the absence of stock from the schedule referred to at (8) above, and we think it probable that there was either some inaccuracy or misunderstanding which led to the record that stock had been purchased.

(16) Miss Duke applied to be deregistered. On the relevant form she ticked the box indicating that she had ceased trading rather than the box indicating that the business had been transferred as a going concern. Mr Spence made something of this. We find nothing in it: we cannot believe that Miss Duke gave the issue detailed consideration and in any event do not see any serious evidential value in her view.

(17) Mr Spence's recent bookkeeping for his business was not thorough or as diligent as it should have been, but it was clear that by August 2005 his VATable supplies had been at least about £50k.

(18) The upper floor of the premises is let to a limited company which operates a bar under the name Moonshine Bar.

(19) Mr Spence was one of the licensees of the premises. The arrangements with his co-lessee were informal. The rent received from the letting of the Moonshine Bar was shared equally between them. But neither of them recognised any income in respect of the ground floor letting because the rent received was offset by the rental payment on the head lease.

The Statutory Provisions and the Cases

Section 49 VATA 1994 provides::

"(1) Where a business carried on by a person is transferred to another person as a going concern, then

(a) for the purpose of determining whether the transferee is liable to be registered under this Act he shall be treated as having carried on the business before as well as after the transfer and supplies by the transferor shall be treated accordingly …"

We note that there are two conditions for the operation of subparagraph (a): first that there is a business carried on by a person; and second that it is transferred as a going concern. As we shall see later these conditions are different from those in the Special Provisions Order.

Schedule 1 of the VAT Act 1994 deals with registration. Paragraph 1(2) deals with the liability of a transferee to register on the transfer of a business. It provides that:

"(2) When a business carried on by a taxable person is transferred to another person as a going concern … then, subject to sub-paragraph (3) to (7) below, the transferee becomes liable to be registered at that time if:

(a) the value of his taxable supplies in the period of one year ending at the time of the transfer has exceeded £51,000; …"

As a result of the combined effect of section 49 and para 1(2)(a), if there is a transfer of a business as a going concern and the transferee's supplies in the 12 months preceding the transfer exceeded the threshold level, then unless paragraphs (3) to (7) apply the transferee becomes liable to register on transfer.

Paragraph 1(3) provides the only potentially relevant exception in the case of this appeal. It provides that registration is not necessary on transfer where the Commissioners are satisfied that the value of supplies in the 12 month following the transfer will be less than £49,000.

In any case where paragraph 1(2) has not had effect on transfer, there remains a general duty to register under paragraph 1(1) if the value of taxable supplies in the preceding year exceeds £51,000, or if there is reason to believe that the value of his supplies in the next 30 days will exceed that sum.

The VAT Special Provisions Order 1995 SI 1995/1268 contains further provisions about the transfer of a going concern. Paragraph 5 of that Order provides that when the assets of a business are transferred in the supply of the taxpayer's "business as a going concern" and where the assets are to be used by the taxpayer in the same kind of business, then the supply is to be treated as neither a supply of goods or services.

It seems to us that the construction of the words "transfers" and "business as a going concern" should be the same in each of these provisions.

Paragraph 5 of the Special Provision Order has as it genesis and authority Article 5(8) of the Sixth Directive:

"In the event of a transfer whether for consideration or not … of a totality of assets or part thereof, Member States may consider that no supply of goods has taken place and in that event the recipient shall be treated as the successor to the transferor."

In Abbey National plc v C&E Commissioners [2001] STC 297 the Advocate General considered that in interpreting Article 5(8) it was helpful to bear in mind its purpose. He found (see paragraph 24 of his opinion) that its purpose was one of convenience:

"If VAT were charged on the transfer of the assets of a business, considerable sums of money might be immobilised only to be deducted later. The net effect might be nil but the business might find itself in financially straightened circumstances at the possible delicate juncture of a change in ownership. A Member State can easily avoid such difficulties by implementing Article 5(8) …".

There is it seems to us at least a hint in this that the aim is to address what would otherwise have been a supply and that it was not intended that the Article would permit the `recipient' to be the `successor' unless some supply was made to the recipient.

Mr Holl referred us to the judgment in Kenmir v Frizzell [1968] 1 All ER 414. This case concerned the question of whether for the purposes of the Contracts of Employment Act 1963:

"… a trade or business or an undertaking [had been] transferred from one person to another."

These statutory words are different from "the transfer of a business as a going concern". Therefore some care must be exercised in reading across the principles in the judgment. The judgment was one of the whole court. At the end they said:-

"In deciding whether the transaction amounted to the transfer of a business, regard must be had to its substance rather than its form, and consideration must be given to all the circumstances … In the end the vital question 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 … an express assignment of goodwill is strong evidence of a transfer of the business, but the absence of such an assignment is not conclusive if the transferee has effectively deprived himself of the power to compete. The absence of an assignment of premises, stock in trade or outstanding contracts will likewise not be conclusive if the particular circumstances of the transferee enable him to carry on substantially the same business as before."

We note that in this passage the court treats "transfer of a business" as meaning the transfer of a business as a going concern, and that the test indicated is whether the transferee could carry it on after the transfer.

In Customs and Excise Commissioners v Dearwood 1986 STC 327 McCowan J applied the passage from Kenmir quoted above to conclude that the test, in the context of the Special Provisions Order, for determining whether a business had been transferred as a going concern was whether or not the transferee could (rather than would) carry on the business after the transfer. He noted at the end of his judgment that there was in the context of that Order also a second test namely whether the assets were to be used by the transferee in carrying on the same business. It seems to us that in relation to the words "transfer of a business as a going concern", this "could" test properly reflects the word "going": what is it that characterises a going concern – the answer is that it is `going' and therefore can continue to `go' after the transfer.

Customs and Excise Commissioners v Padglade [1995] STC 602 also concerned the Special Provisions Order. Schiemann J noted at p.606b that in approaching the `could' test the proper approach was to take a broad view of the circumstances as a whole and referred to an ECJ case in which similar legislation was considered and reference made to the test as to whether the transferee had obtained an undertaking he could continue to operate. He held that the intentions of the transferor could be relevant in considering whether there was a transfer of a going concern, and that the transferee's intention was relevant to the question (in the Order) as to whether the assets were to be used in the same kind of business.

Mr Holl also asked us to consider a number of previous decisions of the tribunal.

In Houshang Takmassehi (VATD 13177), the reasoning of the tribunal was encapsulated thus:

"In short the vendors transferred to the Appellant a restaurant which was a going concern, which however he elected immediately to close for a number of weeks so that he could make all the necessary preparation to reopen in a radically different form. This does not in my opinion affect the fact that what was transferred to him was a restaurant business which enabled him to trade as such …"

In Donald McPherson (VATD 10427) the tenant of a public house ceased trading. The premises and fixtures reverted to the landlord which granted a new tenancy to the appellant. The appellant started trading two weeks after the previous tenant ceased to trade. There was no transfer of stock and no formal transfer of goodwill. The tribunal found that there had been a transfer of a going concern for the purposes of the successor to section 49.

In MPA Leisure Limited (VATD 19778) a club was sold to a third party who leased the previous fixtures and fittings to the appellant who took on the business of the club including its staff and at least 75% of its members. The name of the club was changed. The tribunal held that for the purposes of section 49 there had been a transfer of the business to the appellant (and that it was irrelevant that the third party transferor had not conducted the business).

In EC Reese Agricultural Ltd (VATD 18358) concerned the application of the Special Provisions Order to the sale of the stock of a failing company to the appellant. The purchaser and the vendor traded from the same premises and had broadly the same customers. The tribunal derived seven principles from its review of the case law to which we shall return later. It held that there had been a transfer of a going concern – the only point in favour of the appellant had been that the transferor company was in financial straits and was unable to trade in the stock transferred; on the other side, the retention of the use of a name and telephone, the use of the same premises and the intention that the transferee should realise the stock transferred all pointed to the transfer of a business as a going concern.

We draw the following principles relevant to considering whether a transfer was of a business as a going concern from these cases (acknowledging in doing so our debt to the summary in EC Reese):

(i) the tribunal must look at the whole of the circumstances considering facts which point one way against those which point another way;

(ii) the tribunal must consider the substance of the transaction, not its form;

(iii) the vital consideration is whether the effect of the transaction was to put the transferee in a position in which he could, not would, carry on without interruption;

(iv) many factors will be relevant though few conclusive. Among those which are relevant are:-

(a) whether there was a transfer of goodwill, or if not whether the transferor put himself in a position whence he could not compete;

(b) the intention of the transferee to transfer his business as a going concern;

(c) whether premises, stock in trade, outstanding contracts, employees, or customers have been transferred or their retention facilitated or intended;

(d) whether there is a break in carrying on the business; but this will generally be of little weight.

Those principles relate to whether the transfer was of a business as a going concern. But there must also be a "transfer of a business". That expression is coloured by the Sixth Directive's words "a totality of assets", and that suggests strongly to us that it must be possible to identify assets which by reason of the transfer rest in the transferee and which can be called a business.

Application

We consider first whether the transaction was such that the Appellant could carry on the same business. We find that it was: the transaction left the Appellant with the premises and all the physical assets necessary to carry on the restaurant trade. That he was able to reopen as a Mexican style restaurant was evidence that he could carry on the same trade. His inability to use the very same name for the restaurant did not in our view prevent the business from being the same.

Next we consider what was transferred to the Appellant. There was a sale of some crockery; the other physical assets were already his but he was freed from the impediment of the licence. Mr Holl urged on us that the cessation of the licence transferred the enjoyment of the assets to the Appellant and that that was the transfer of a business. Whilst we appreciate that in the Sixth Directive "transfer" probably has an independent European meaning and may not be restricted to something which English law would call a transfer, consideration of the purpose of the directive's provision suggest that it must be something which could be called a supply. And the reversion of a right to enjoyment otherwise than for consideration does not seem to us to be a supply. We therefore incline to the view that there was no transfer of the right to enjoy the premises or the fixtures and chattels.

Neither does it seem to us that there was any transfer of goodwill. There was no formal such transfer and Miss Duke's retention and protective action in relation to the trade mark did not suggest either an intention to transfer goodwill or that she put herself in a position where she could not compete. The refusal by the Appellant to accept Miss Duke's formal agreement likewise suggests no transfer of goodwill. To the extent that there was goodwill in the location of the premises this was part of those premises: it thus reverted to the Appellant at the termination of the tenancy and was not transferred to the Appellant.

Thus the only assets transferred to the Appellant in our view were the pieces of crockery etc referred to in paragraph 6(8) above.

We now stand back and ask whether this transfer of assets in all the circumstances was in substance the transfer of a business. We note the following:

(i) a break of 30 days. We think that this was irrelevant. It was not a necessary part of the transaction but a choice of the Appellant;

(ii) the absence of a formal transfer of goodwill, or a transfer of the name, or of the Appellant preventing herself from competing;

(iii) the movement with the interest in the premises of goodwill attached to the location;

(iv) the failure of the parties to agree an arrangement under which the Appellant would licence right from Miss Duke and thus the absence of an intention to transfer the business; and

(v) the fact that stock in trade and employees were not transferred or retained – employees weighing heavier in the scales than stocks of food or drink.

Putting these together we do not think that the transfer of the crockery could in those circumstances be said in substance to be the transfer of a business. If it had been then it would have been the transfer of a business as a going concern because the Appellant could have carried on the business. But the absence of any real transfer of the heart of the business in the end persuaded us that this was not a transfer of a business as a going concern.

We therefore allow the appeal.

Our decision was unanimous. We decided not to award costs.

CHARLES HELLIER

CHAIRMAN

RELEASED: 1 February 2008

LON 2006/0919