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HMRC internal manual

VAT Transfer of a going concern

Article 5 VAT (Special Provisions) Order 1995: Same kind of business: Franchises

The purchase of a franchise usually involves the purchaser in buying:

a.     initial stock;

b.       the right to use the trading style of the franchisor;

c.       the right to trade in a certain geographical area;

d.       technical and marketing support etc.

On the face of it this would lead one to the view that a TOGC has taken place. However this is unlikely to be the case as the franchisor (the seller) and the franchisee (the purchaser) will not normally be carrying on the same kind of business. Normally the franchisor’s business is that of granting franchises; the franchisee’s business is selling the goods or services under the terms of the franchise agreement. This is illustrated in the case below:

Delta Newsagents’ (MAN/86/69) business was to acquire existing newsagent shops and grant franchises. The franchisees were tied to a wholesaler associated with Delta. Delta retained the freehold head lease to the premises and it was Delta’s name on the shop front. One franchise was granted to a Mr & Mrs Rafferty. Subsequently the franchise agreement was terminated and the fixtures and fittings together with goodwill were sold to the Raffertys. The tribunal found that the assets being sold were not being used by the Raffertys in carrying on the same kind of business as Delta and therefore there was no TOGC for VAT purposes. Delta’s business was franchising or renting out property whilst the Raffertys would be running a newsagent. It was Delta’s normal practice to buy the retail shop and then run it on its own behalf for a while so as to decide its viability, before granting the franchise. If the sale to the Raffertys had been prior to the granting of the franchise then the assets would have been used to carry on the same kind of business i.e. a newsagent.

It is important therefore to find out whether the franchisor has actually operated the business being transferred. Where they have, it is capable of being a TOGC. Merely the granting of a franchise is not a TOGC. The point to remember is that the granting of a franchise is not the same kind of business as making supplies of goods and services under a franchise agreement.

It is common for the franchisor to own the freehold or head lease from which the franchisee operates as sub-lessee. If the franchisee gives up the franchise, the franchisor may “install” another franchisee in the premises. In these circumstances you should examine whether the new franchisee is buying the premises, stock or fixtures and fittings from the old franchisee or from the franchisor. If it is the latter there has been no continuation of the same kind of business. If it is the former, then you need to be satisfied that what is being transferred is a business and that it has not died. A TOGC for VAT purposes may be possible in this situation. The fact that the permission of the franchisor may be necessary for the assets to be sold does not debar the transaction from being desupplied.

This principle of reliance on a third party was confirmed in the tribunal case Augusta Extrusions Ltd (LON/91/298Y) – in turning down a claim for input tax on the purchase of plant and stock by a manufacturing company that had acquired these items from a similar business, the court stated that “where, as in this case, the purchaser by a single contract with a third party, executed contemporaneously and also having immediate effect, has put himself in the position to be able to carry on the vendor’s business, there can be a transfer of that business as a going concern.”