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HMRC internal manual

VAT Transfer of a going concern

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HM Revenue & Customs
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Article 5 VAT (Special Provisions) Order 1995: Intentions of purchaser

If a purchaser intends in due course to carry on a different kind of business using the assets purchased, the sale may still be a TOGC if he is to continue the old businesses initially. This test does not lend itself to a set time-span, because ‘continuation of a business’ can vary between different types of activity.

This was the case in Dearwood (STC 327 /1987) This case was won by the Department on appeal to the High Court. Dearwood was a dealer in kitchens and bathrooms and acquired the assets of a company that made reproduction furniture.

Although the intention of Dearwood was to change the nature of the business acquired, what it had acquired was still a business capable of being continued. Furthermore, as a matter of fact, the assets purchased were used to carry on the same business, as Dearwood sold the reproduction furniture it purchased.

Similarly, Brian Oliver Jones (MAN/90/136) purchased a nightclub with a view to turning it into a restaurant. However, he ran it for one week as a night club. For this reason the tribunal found there to have been a TOGC for VAT purposes.

This can be contrasted with the following case.

The Padglade case, at tribunal (MAN/93/210) and in the High Court (STC 602/1995) provides useful guidance on the importance of motive. Padglade claimed as input tax, tax incurred on the purchase of various items and goods from Intermill Ltd. Intermill and Padglade had a common director. Despite this it has held that there was no TOGC as tribunal found that “the necessary rapport between vendor and purchaser was missing”. The director asserted that the purpose of Padglade buying the goods was to assist Intermill to raise funds to cope with its financial difficulties - not to take over any part of its business. The HMCE argument that the tribunal was not entitled in law to take motive into account was rejected by the High Court in upholding the tribunal’s decision. The judge commented:

“The tribunal was entitled in principle to take into account the state of mind of both the transferor and the transferee at the time of the transfer. The fact that in truth, the transferor and the transferee, were controlled by the same man, is not legally relevant.”

It is not possible to set out hard and fast minimum periods that automatically define how long a business must be maintained by a purchaser for it to be regarded as a ‘continuing business’ as to do so could lead to contrived TOGCs.  Instead, a ‘continuing business’ should always depend upon the nature of the business carried on and the intention of the purchaser.