Article 5 VAT (Special Provisions) Order 1995: Same kind of business: General
Paragraphs (1)(a)(i) and (b)(i) of Article 5 of the VAT (Special Provisions) Order 1995 require the assets being transferred to be used by the purchaser in carrying on the same kind of business as that carried on by the seller.
It should be noted that the assets transferred must be used or intended to be used by the purchaser - this precludes scenarios where assets are instantaneously moved between often related companies.
It is a key point that “carrying on the same kind of business” should be regarded as meaning that there must be a continuing business activity (rather than mere acquisition of assets with a view to liquidation). It is the continuation of an economic activity that is important, not necessarily that it is identical to that of the seller. See Zita Modes (ECJ C-497/01)
See also Intelligent Managed Services Ltd (FTC/27/2014) [VTOGC3250] which held that “same kind of business” should be given its ordinary meaning and “must be addressed by having regard to all the circumstances, and with reference to the perspective both of the transferor and of the transferee.”
It is in determining whether the purchaser is continuing the same kind of business that care must be taken. Has the business continued or are the assets being used for some unrelated purpose? In most cases it is quite apparent. For example a pub will continue to be run as a pub even if a different clientele is aimed for and different beer sold, G Draper (Marlow) Ltd (LON/85/439)**.
Similarly, in Housand Tahmassebi t/a Sale Pepe (MAN/94/197) a change from an Indian restaurant to an Italian one was found to be the transfer of the same type of business. The tribunal chairman commented: “… the vendors transferred to the appellant a restaurant which was a going concern, which however he elected immediately to close for a period of a number of weeks so that he could make all the necessary preparations 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 a transformed guise, once the preparations to reopen had been made.”
If a purchaser of a business sells to retail customers where the seller of the business made supplies to wholesalers, this is not necessarily a different kind of business. In the case of Village Collection Interiors Ltd, (LON/90/1882) the seller was in business manufacturing furniture which was sold (wholesale) to a company with 16 retail shops. The retailing company bought the seller’s business, and the tribunal decided that the purchaser carried on the same kind of business - manufacturing and selling furniture - as the seller, despite the switch from wholesale to retail sales.
There is a distinction between a property investment company and business operated from the properties that it owns. In the following example, there was no TOGC.
In Morland and Co plc (LON/91/1653X) Morland acquired 98 freehold public houses from a company, Estates, and claimed input tax on the acquisition. HMRC disputed this on the grounds that the transfer of the properties was a Transfer of a Going Concern. Prior to the sale to Morland the 98 public houses had been let to Courage Ltd who sublet them to tenants as tied houses. Under the sale agreement, Courage’s interest passed to Morland.
The business of Estates was property investment. It owned around 1000 public houses, all of which were let to Courage. It did not carry on the activity of brewing or trading in beer, wine or spirits.
Before: Estates owns the freehold and leases all of the properties to Courage who in turn sub-let them to tenants as tied houses.
The Transaction: Estates sells the freehold of the properties to Morland.
After: Morland leases directly to the tenants.
The chairman ruled that this was not a TOGC.
It was not important that there was no transfer of staff, administration, stock or goodwill. The fact that Estates was 50% owned by Courage was not a determining factor. The distinction was that Estates was purely in the business of letting properties. It did not transfer any of the leases that it had with Courage. It sold only the freehold to Morland who subsequently set up new leases with the tenants. Morland did not use the assets transferred to carry on the same kind of business as Estates.