Article 5 VAT (Special Provisions) Order 1995: Motive of purchasers/intention to carry on a different business
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. The Judge decided that:
“The vital consideration is whether the effect of the transaction was to put the transferee in possession of a going concern, the activities of which he could carry on without interruption.”
Although the intention of Dearwood was to change the nature of the business acquired, what he 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.
The important point to establish is whether the business could be run by the purchaser not that it will be. Tribunals have looked into the motivation behind the purchase on a number of occasions but have not found it the most persuasive argument once all other factors have been taken into consideration.
P N Rakshit (LON/87/716) purchased the trimmings side of an existing clothing manufacturer’s business. He did not really want the business but saw it as a means to obtain the premises. However, he took over existing staff and agreed to a restrictive covenant. In addition the price paid included an element of goodwill. The tribunal found that the transfer of the assets was a TOGC for VAT purposes. Whatever Mr Rakshit’s intention may have been he had entered into a contract to buy a business which he could have carried on as a going concern. This is similar to Brian Oliver Jones (MAN/90/136) who purchased a night club 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.
Although we lost at both the tribunal (MAN/93/210) and in the High Court (STC 602/1995) the case of Padglade Ltd does provide 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. Our argument was 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.”