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. An indication that this is the case is that the part transferred has made supplies and will make supplies in the future. The assets must not merely be used for over heads of the business. It must already have the characteristics of a business, of which a significant one is that it has customers to whom it makes supplies as defined assuch for VAT purposes.
It is also possible for assets that did not form a business in their own right when formerly owned to be transferred as a going concern.
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. The sale of the equipment to a third party was found to be a TOGC. The tribunal commented that: “The requirement that the part of the business transferred by 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.’
The Advocate General also quotes Commerz-Credit Bank AG and Europartner concerning the ECJ order of 13 Oct 1992 - ‘line of activity’ is defined as ‘an organised aggregate of assets and persons capable of contributing to the performance of a specified activity.’
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 orancillary’.
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 questions put to the ECJ were -‘ is article 5(8) of the 6th Directive to beinterpreted as meaning that there can be a transaction not subject to VAT 1) If the totality of assets is transferred to a taxable person - whatever the taxable person’s activity may be or whatever use he makes of the property transferred?
2) If the answer to the first question is no, should it be understood to mean the transfer of all or part of an undertaking to a taxable person who continues the whole activity of the transferor undertaking or continues the activity of the branch corresponding to the part of the totality of assets transferred, or merely as meaning the transfer of a totality of assets or part thereof to a taxable person who continues the transferor’s line of activity in whole or in part, without there being any transfer of an undertaking or branch of an undertaking 3) other conditions i.e. license
The Advocate General Jacobs, in his opinion on Zita Modes said;
Totality of assets or part thereof
‘33. In the light of the purpose of Article 5(8) as explained above, we may consider its scope and the type of transaction to which it may apply.
Where a totality of assets is concerned, there is little difficulty. The transfer in question is that of a business as a whole which as the Commission has pointed out will comprise a number of different elements. For example, the French term fonds de commerce, used on the invoice in the case in the main proceedings, has been defined in legal dictionaries (14) as including elements both corporeal (such as plant, equipment and stock-in-trade) and in corporeal (such as the tenant’s interest in a lease, the trade name or sign, patents, trade marks and goodwill). One might add trade secrets, business records, customer lists, the benefit of existing contracts and so forth.
The cement which binds such elements together is the fact that they combine to allow the pursuit of a specific economic activity, or group of activities, while each in isolation would be insufficient for that purpose. Separately, they are the building blocks of a business; together, they amount to a business.
It follows in my view that the concept of part of a totality of assets relates not to one or more individual elements from that list but to a sufficient combination thereof to allow the pursuit of an economic activity, even if that activity forms only part of a larger business from which it has been detached.
That may be contrasted with a case in which a retailer closes one of his outlets and sells its stock to another trader, or a service firm discontinues one type of service and disposes of the relevant equipment to a competitor. Such transactions might be argued to fall within the literal meaning of transfer of part of a totality of assets but so, in that case, could any sale of any asset. In the light however of the purpose of Article 5(8), it seems clear that they do not and that what is meant is the transfer of a self-standing part of a more extensive business.
Where a taxable person acquires individual assets - a trade mark, say, or part oreven all of a business’s stock-in-trade or equipment - from another taxable person, that may be regarded as a normal business transaction or investment and the advance of VAT as anormal part of a trader’s obligations. Where however the transfer involves a whole business, the event is an exceptional one and special treatment may be justified because the amount of VAT to be advanced on the transfer is likely to be particularly large in relation to the resources of the business in question.’
In his conclusion on the need to carry on the same type of business:
‘(2) In order for there to be such a transfer, the assets transferred must form a sufficient whole to allow the pursuit of an economic activity and that activity must be pursued by the transferee. The transaction and its surrounding circumstances must be assessed globally in order to determine whether that is the case, having regard in particular to the nature of the assets transferred and the degree of continuity or similarity between the activities carried on before and after the transfer. In that context, it is not necessary for the transferee’s business to be the same as that of the transferor.’
The ECJ Judgement in Zita Modes stated;
‘33. As to the assets transferred and the use made of those assets by the transferee after the transfer, firstly, the Sixth Directive does not include any definition of a transfer, whether for consideration or not or as a contribution to a company, of a totality of assets or part thereof.
However, according to settled case-law, the need for uniform application of Community law and the principle of equality require that the terms of a provision of Community law which makes no express reference to the law of the Member States for the purpose of determining its meaning and scope must normally be given an autonomous and uniform interpretation throughout the Community; that interpretation must take into account the context of the provision and the purpose of the legislation in question…..
The context of Article 5(8) and the purpose of the Sixth Directive, as set out in paragraphs 36 to 38 of this judgment, make it clear that that provision is intended to enable the Member States to facilitate transfers of undertakings or parts of undertakings by simplifying them and preventing overburdening the resources of the transferee with a disproportionate charge to tax which would in any event ultimately be recovered by deduction of the input VAT paid.
Having regard to this purpose, the concept of a transfer, whether for consideration or not or as a contribution to a company, of a totality of assets or part thereof must be interpreted as meaning that it covers the transfer of a business or an independent part of an undertaking including tangible elements and, as the case may be, intangible elements which, together, constitute an undertaking or a part of an undertaking capable of carrying on an independent economic activity, but that it does not cover the simple transfer of assets, such as the sale of a stock of products.
Secondly, concerning the use which is to be made by the transferee of the totality of assets transferred, clearly Article 5(8) of the Sixth Directive does not contain any express requirement as to that use.
As regards the fact that Article 5(8) provides that the transferee is to be treated as the successor to the transferor, it follows from the wording of that paragraph, as the Commission correctly points out, that the succession does not constitute a condition for the application of the paragraph, but is merely a result of the fact that no supply is considered to have taken place.
However, it is apparent from the purpose of Article 5(8) of the Sixth Directive and from the interpretation of the concept of a transfer, whether for consideration or not or as a contribution to a company, of a totality of assets or part thereof which flows from it, as set out in paragraph 40 of this judgment, that the transfers referred to in that provision are those in which the transferee intends to operate the business or the part of the undertaking transferred and not simply to immediately liquidate the activity concerned and sell the stock, if any.
The answer to the first and second questions must therefore be that Article 5(8) ofthe Sixth Directive must be interpreted as meaning that when a Member State has made use of the option in the first sentence of that paragraph to consider that for the purposes of VAT no supply of goods has taken place in the event of a transfer of a totality of assets, that no-supply rule applies - without prejudice to use of the possibility of restricting its application in the circumstances laid down in the second sentence of the same paragraph - to any transfer of a business or an independent part of an undertaking, including tangible elements and, as the case may be, intangible elements which, together, constitute an undertaking or a part of an undertaking capable of carrying on an independent economic activity. The transferee must however intend to operate the business or the part of the undertaking transferred and not simply to immediately liquidate the activity concerned and sell the stock, if any.’