Article 5 VAT (Special Provisions) Order 1995: Supplies of assets of a business
Article 5 refers to “supplies by a person”. It does not say “taxable person”. It is quite clear that it was not intended to mean “taxable person” as the article goes on to say at (a)(ii):
“where in a case in which the transferor is a taxable person …”
Thus it envisages situations where the seller is not a taxable person, for example trading below the registration limit or making wholly exempt supplies. A TOGC is possible in both these circumstances. VTOGC4300 discusses the TOGC of exempt activities.
Article 5 refers to “supplies by a person of assets of his business”. It is important, therefore, to focus on the assets themselves and their supply, not just the business activity. If there is no supply of the seller’s assets, there is nothing to which the TOGC provisions can apply, even if a business activity is transferred.
It is important to look at the reality behind a transaction. For example;
- where all the shares in a limited company are sold, it may be said that the ‘business’ has been transferred to a new owner. However, there has been no supply of the assets of the company so the provisions do not apply (see VTOGC2100).
This view was confirmed by the CJEU in X BV (C-651/11). The case concerned a Dutch company, referred to as X BV, which disposed of its entire shareholding in company A (which was 30 per cent of A’s total shares).
X BV had provided management services to A, which it ceased to do at the time the shares were disposed of. All other shareholders in A disposed of their shares at the same time.
The key issues considered by the ECJ were whether:
a. the disposal of 30 per cent of shares in a company, to which the transferor of the shares had supplied services, can be treated as a TOGC; and
b. a disposal by all the shareholders of all their shares in a company at the same time to a single legal person constitutes a TOGC.
In an earlier ECJ case, SKF (C-29/08), the ECJ had indicated that there may be some circumstances in which a disposal of shares could be capable of constituting a TOGC. The judgment did not elaborate on what those circumstances were.
In the X BV judgment, the ECJ found that:
c. the simple disposal of shares cannot be treated as a TOGC as, on its own, this does not allow the transferee to carry on an independent economic activity. The cessation of management activities was a direct and logical result of the sale of X BV’s holding and did not turn this disposal into a TOGC;
the sale of shares to transfer ownership/management of a company is an exempt supply which may, or may not, be part of an economic activity.
However, be aware that if someone has a business that involves trading portfolios of shares then these portfolios may be an asset of the business and could effectively be seen and treated as trading stock for TOGC purposes.
Assets must be ‘supplied’ for the TOGC provisions to apply so, where a business is transferred together with its assets but with no consideration for those assets (so that there is no supply or deemed supply) there is nothing to which the TOGC provisions can be applied.