Article 5 VAT (Special Provisions) Order 1995: Has there been the transfer of a business or just a sale of assets?: Trading patterns
In order to determine whether a TOGC has occurred, it is important to pay attention to whether a business is actually trading at the time of the transfer.
Continuity of Former Business
In order for a business to be transferred it clearly must still be in existence at the time the transfer takes place. The business does not need to be a flourishing business. Even if the business has been scaled down due to financial difficulties or in anticipation of a sale there may still be a business to transfer (Baltic Leasing (LON/84/198)). In order to be regarded as “dead” we would normally expect such evidence as all employees having been made redundant, orders no longer being accepted/sought, supplies ceasing (see below).
J P Neville (LON/92/2527A) worked as a self-employed metal worker in the building industry. Most of his business was through a sub-contractor (Claydon). Claydon had financial difficulties due to the collapse of his main contractor and ceased to trade. Neville renegotiated the contracts with the new owners of the buildings including re-pricing the work. In order to fulfil these contracts he bought steel from Claydon. He also arranged with the landlord to become tenant of the property formerly occupied by Claydon. The tribunal found that the Claydon’s business had not been transferred as a going concern. He had disposed of his equipment and premises and had made his staff redundant. The parties with whom he had contracted had collapsed owing him money and goodwill was non existent. The business had therefore died. All he had left was the steel which did not constitute a business in its own right (see VTOGC6050).
Profitability/ Cessation of Trading
The expression “a going concern” is commonly used to describe a business which is commercially viable. This is NOT the way in which tribunals have interpreted the term for the purposes of the TOGC provisions. Their view is that the term refers to a business which is live or operating. A business which is in financial difficulties or even in liquidation, receivership or bankruptcy can be a going concern. This principle was confirmed in Dearwood (STC 327/1987) where the High Court found that a dying business, in liquidation was nevertheless transferred as a going concern.
If a business ceases to trade before it is sold, there may be a question as to whether it is a going concern. As with a break of trading after the purchase, the kind of business involved is very important. In Thruxton Parachute Club (LON/84/331) the sporadic nature of parachuting was seen as being an important consideration in deciding that the former business had not completely died and was therefore capable of being transferred as a going concern. If a seasonal business has been closed during what is normally the closed season, it may still be a going concern. For example, they may be advertising for customers, accepting bookings for when they reopen etc.
In contrast, the business may cease only immediately before the sale, but because the business has effectively disappeared, the transaction may not be a TOGC.
Break in Trade
It is not necessary for the new business to follow on immediately from the old for there to be a TOGC, although to have done so is an indication that a TOGC has taken place.
The ‘break in trade’ needs to be considered in the context of the type of business concerned, this may vary between different types of trade or activity. For example, HMRC do not consider that where a ‘seasonal’ business has closed for the ‘off-season’, as normal at the time of sale, that there has necessarily been a break in trade.
With pubs and restaurants there is often a break during which the premises are refurbished before trading starts again. In Harber (LON/94/972) the pub was left in such a state that the new owner could not begin to trade for several days. Despite this gap and the fact that different beer and food were sold it was held to be a TOGC. A similar decision was reached in a comparable case, Lyall t/a Old Red Lion Restaurant (LON/83/28).
Again the relative importance to be attached to a break in trading will depend on the other facts of the case. In Montrose (EDN/87/98) it was held a 2 month break before the new owner began trading was not significant. A TOGC had taken place as all other factors pointed in that direction. The purchaser took over the shop premises, stock, fixtures and fittings, available staff and the name of the transferor company.
Yet again if the purchaser of a seaside boarding house bought the property in November but did not open until April, the 5 month break of trading would not necessarily be significant, in the context of normal trading patterns. However, a 5 month break of trade following the purchase of a newsagents probably would be significant.