Article 5 VAT (Special Provisions) Order 1995: Sale of part of a business
Where only part of a business is being sold, the part transferred must be “capable of separate operation” for the TOGC provisions to apply. The important point here is that the business or part of a business must be capable of separate operation - not that it has been run as a separate operation by the seller or that it will be by the purchaser. It must have the characteristics of a business and not just be a collection of assets that have been used by the seller and sold as such.
A possible significant indicator that what is being sold is a business is that it has customers to whom it makes supplies as defined as such for VAT purposes.
It is possible for assets that did not form a business in their own right when formerly owned to be transferred as a going concern, provided that they are such a business when sold.
In Jeyes Ltd (LON/92/1277P), Jeyes owned a bottle making facility for the production of its own bottles “in-house”. This activity was costed separately from other activities and from the production of primary products. Bottles were also sold outside the group although this was not regarded as a business in its own right. The sale of the plant and equipment to a third party was treated as a TOGC, even though the Jeyes bottle moulds were not part of the deal. Employees of Jeyes engaged in blow moulding bottles became employees of the purchaser with an indemnity if redundancies arose through insufficient orders by Jeyes. The purchaser could sell bottles to third parties but could not use Jeyes’ moulds without its consent. The tribunal commented that: “The requirement that the part of the business transferred be capable of separate operation clearly implies that the part transferred may not be a separate operation before transfer.”
Where the existing business is the branch of a larger concern and certain support services are provided centrally - typically accounting, personnel etc., the transfer of the branch can still be a TOGC. This was confirmed in Cosalt Coolair Ltd (MAN/85/38) where the Chairman observed:
“The fact that part of a business can only run if integrated into another business which has the facilities to support it does not in the judgement of the tribunal necessarily mean that it is incapable of separate operation.”
The case of FMCG Home Services Ltd (LON/00/529) illustrates that the part transferred should have made supplies to be capable of TOGC.
In FMCG The Prudential Corporation PLC (Prudential) provided life assurance and other financial services. Prudential transferred its cash collection activities to FMCG. The assets transferred included staff, customer lists, a licence to use specialised equipment, goodwill and the agreement that it could act on behalf of the Prudential in respect of collecting money owed and handling complaints. The cash collection business had operated within Prudential’s life and pensions business unit prior to the transfer. It specialised in collecting the premiums in relation to the life assurance policies. The Tribunal agreed with HMRC that for a transfer to qualify as a TOGC the part of the business transferred must have operated as a separate business or business unit before the transfer. However, in this case the cash collection activities did not include the making of supplies, these activities only took the identity of a business when FMCG began to make supplies to Prudential. The Prudential’s cash collection activity prior to the transfer was merely an overhead of Prudential’s insurance business. Thus the sale of cash collection was no more than the transferring of part of the assets of the concern and VAT was due on the consideration paid.
That case made reference to the tribunal case Royal Bank of Scotland Group Plc (EDN/01/0105) in which cheque clearing services comprising staff, licences and equipment and the sale or lease of various properties were transferred. The tribunal found that there had been a TOGC by RBS. However, it should be noted that the cheque clearing services transferred did make supplies prior to the transfer to institutions which were not themselves clearing banks.
Another indication is that the nature of the activity must already have been determined. Both the extent to which the activity pursued by the buyer is similar to that of the seller and the identification of part of a business capable of transfer as a going concern have been considered in the following ECJ cases;
Advocate General Jacobs considered the meaning of a’ totality of assets or part thereof’ in the context of the then 6th VAT directive at point 27 and 28 of his opinion in the Abbey National case (C-408/98):
‘27. The concept of ‘part of a totality of assets, (9) however, is not as clear. In particular, the question arises as to how a distinction is to be drawn between the transfer of such a part and an ordinary transfer of one or more of the assets of a business, which would normally be a taxable transaction. Community law is silent on the point; no elucidation is to be found in any of the VAT directives, nor has the question hitherto been considered by the Court.
- The solution adopted in the United Kingdom would appear to be a reasonable one: when assets representing a part of a business which is capable of separate operation are transferred in such a way that the transferred business continues as a going concern, the option exercised under Article 5(8) of the Sixth Directive applies and no supply is deemed to have taken place. Those criteria do not appear to place any strain on the broad wording of the Community provision, and whether they are met in a particular case must thus remain a matter for the competent national court.’
Also quoted is the Directive 2001/23/CE relating to rights of workers when there is a ‘transfer of an undertaking’ which is ‘that of an economic entity which retains its identity, meaning an organised grouping of resources which has the objective of pursuing an economic activity, whether or not that activity is central or ancillary’.
In many respects, the touchstone case is that of Zita Modes (C-497/01).
A company Zita Modes invoiced Parfumerie Milady for the ‘sale of a ready-to-wear business’. The sale was of ‘fashion accessories matching the ready-made articles’ which comprised perfumery articles produced by the same company as that which made the ready-made articles. Zita Modes considered the sale to fall within the provisions which allow a transfer of a business to be treated as not a supply for VAT purposes. The Luxembourg tax authorities disagreed arguing that the vendor ran a clothing business and the purchaser a perfumery business so there was no continuation of the activity of the transferor as he was not in the same line of activity. Moreover, Perfumerie Milady did not have the necessary administrative authorisation to carry on the business of the transferor.
The case was referred to the ECJ. The ECJ considered whether the buyer of the business needs to pursue the same type of business as the seller. The ECJ also considered how the rules should operate when only part of a business is transferred.
The ECJ found that for a transfer to benefit from the special treatment:
· The undertaking (or part) transferred must be capable of carrying on an independent economic activity, rather than being the simple transfer of assets, such as the sale of stock; and
· The buyer does not need to pursue the same type of business as the seller prior to the transfer, but must intend to continue the business transferred rather than liquidating the assets.