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HMRC internal manual

VAT Transfer of a going concern

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Transfers and VAT Groups: Transfers into a VAT Group

Policy relating to transfers into a VAT group has changed as a result of the Upper Tier decision Intelligent Managed Service Limited (([2015] UKUT 0341 (TCC). (IMSL)

Note: This supersedes Guidance in section 4.3 of Public Notice 700/9 published 6 December 2012.

Prior to IMSL we did not accept there could be a TOGC into a VAT group where the transferee only made intra-group supplies.

HMRC now accepts that if a business is transferred to a company in a VAT group and both

•that company intends to continue to use the transferred assets to operate the same kind of business in providing supplies to other group members

•those other group members use the supplies to make supplies outside of the group

then the transfer of the business to this initial company is a TOGC.

However, if group members do not use this supply of the transferred assets to make supplies outside the group, then we do not see this transaction as a TOGC.
 

Although whether a TOGC has occurred will depend upon the facts of a particular case, we derive guidance from the comments of Mr Justice Barling in IMSL. (below)

Intelligent Managed Services Limited (MSL) had been developing a banking platform. It sold this part of its business to Virgin Money Management Services Limited (VMMSL). VMMSL continued to develop the software and then supplied software services to Virgin Money Bank Limited (VMBL). VMBL used these services to supply retail banking to its customers. VMMSL and VMBL were at the time members of the Virgin Money Group VAT group (VMG). HMRC considered that the supply of the assets of IMSL’s business to VMMSL was subject to VAT because that business ceased at the point of transfer.

The Upper Tribunal disagreed with HMRC, saying that the transfer of IMSL’s banking support services business to VMMSL was the transfer of a business as a going concern (TOGC).

The Upper Tribunal considered that while VAT grouping treats the representative member as carrying on the business of each member of that group, it does not change the nature of the businesses carried on by the individual members whose activities remain separate as a matter of fact. Looked at objectively, VMMSL hadn’t intended to liquidate the transferred assets but rather to carry on the same kind of business as IMSL as part of its own banking support services. Consequently, in its judgment, there’s nothing in the VAT group rules that could prevent the transfer of IMSL’s business to VMMSL from being a TOGC.

The Upper Tribunal considered these facts in the light of *Zita Modes SARL (C-497/01) *and *Staatssecretaris van Financien v X BV *(Case C-651/11) [2013] STC 1893 from which it drew the following principles.

(1) In order to be a transfer of a totality of assets, or part thereof, the assets transferred must together constitute an undertaking capable of carrying on an independent economic activity.

(2) This is to be distinguished from a mere transfer of assets.

(3) The nature of the transaction must be ascertained from an overall assessment of the factual circumstances, which includes the intentions of the transferee, as determined by objective evidence, and the nature of the economic activity sought to be continued.

(4) The transferee must intend to operate the business, or the part of the undertaking, transferred and not simply to liquidate the activity concerned immediately and sell the stock, if any.

(5) Although succession to the business is not a condition, but a consequence of the application of the no-supply rule, the nature of the transaction must be such as to allow the transferee to continue the independent economic activity previously carried on by the seller.

(6) Arbitrary distinctions are to be avoided, where those distinctions do not apply by virtue of the wording or purpose of Articles 19 and 29 and the principle of fiscal neutrality must be respected.

Commenting on these principles Mr Justice Barling went on

It is necessary therefore to have regard to all the circumstances in determining whether the transaction is a mere transfer of assets, or of an undertaking which can carry on an independent economic activity. That must be considered both from the perspective of the transferor, and what is transferred, and from the perspective of the transferee, who must intend to operate the business as a continuation of the independent economic activity previously carried on by the transferor.

Applying these principles, the UT decided that a TOGC had taken place.  “In our judgment, there is nothing in the group rules that can prevent the transfer of IMSL’s business to VMMSL from being a TOGC. The transfer was of the whole undertaking of IMSL in relation to the banking engine services. VMMSL is accepted as having had the requisite intention to carry on that business, and not to liquidate the activity or do anything else that could lead to the conclusion that this was no more than a transfer of assets. VMMSL provided the banking engine services to VMBL, which incorporated the product of those services into its own retail banking services that it supplied to third party customers. The effect of VMMSL being within the VMG VAT group is that it is the group, as the single taxable person, that is treated as the transferee, and it is the group that is treated as carrying on each of the businesses of the group members, but none of the statutory disregards, nor the description that can be applied to the external supplies made by the group as a whole, can alter the fact that the group, in combination with its other businesses, continued to use the assets transferred in the same kind of business as that formerly carried on by IMSL.

Accordingly, we find that the transfer by IMSL of the assets of its business to VMMSL satisfied the conditions of article 5(1) of the SPO, and that those supplies are accordingly to be treated as neither a supply of goods nor a supply of services.”