VTOGC3150 - Article 2 VAT (Special Provisions) Order 1995: Is what has been transferred a business activity?

You should always consider whether what has been transferred is a business activity in the VAT sense. As at VTOGC2050, if it is not a business, there cannot be the transfer of a business (as a going concern), so the TOGC provisions do not apply. Examples of non-business activities are those carried on by regulatory bodies in consequence of their statutory obligations, for example, a local council. An example of this arose in the Peddars Way Housing Association (LON/93/2649A).

The Peddars Way case essentially concerned council housing that it had acquired from the local authority. To win their case they needed to establish that a TOGC had taken place the effect of which was to put them in the same position as the local authority. Its argument was based on an interpretation of Article 5.8 of the EU 6th Directive. It lost on this point alone, but the tribunal held in any case that although both rent homes to tenants, the council and the housing association do not carry out the same kind of business within the same constraints. The housing association for example, had no statutory duty to house the homeless nor are its funds “ring-fenced” to the same extent.

Another case that turned on whether the assets transferred constituted a ‘business’ was Royal College of Paediatrics and Child Health (and 1 other) [2015] UKUT 0038 (TCC). In this case, the college, which is partial exempt for tax purposes, wanted to purchase a building that it intended to occupy itself and at the same time move across its tenants from the existing premises that it owned. Prior to the purchase it arranged with the vendor to enter into a lease agreement with one of the prospective tenants, on the understanding that the building would be sold to the college which would in turn resume its role as the tenants’ landlord. The College maintained that this transaction was a TOGC because it was purchasing, and would continue to operate, a property letting business.

In finding that the transaction was not a TOGC, the Chairman said

'’If the sale of the Property had been simply a transfer of the freehold and nothing else then I cannot see how it could possibly be a transfer of a going concern. Something else had to be transferred as well as the property and that further element has to have the appropriate characteristics. In a normal case of the transfer of a freehold, no doubt it is enough for the extra element to be a transfer of a lease to a tenant or even an agreement with a putative tenant to do so. As long as that lease which is transferred (or the agreement) can truly be said to have been part of the seller’s business then the requirements of the law will be satisfied. Normally I suppose it will be. However here the agreement for a lease was not part of the seller’s business at all. The putative tenants were never part of Coleridge’s business, they came from the purchaser. The agreement arose directly from and was simply part of the sale transaction. No part of seller’s business was transferred to the buyer. For this reason the transfer was not a transfer of a going concern.’‘(Emphasis added)

The term “business” is defined in s94 VAT Act 1994 as including “any trade, profession or vocation”. The HMRC view is expressed in Notice 700 “The VAT Guide” Section 4.6 which says:

“In VAT terms, business means any continuing activity which is mainly concerned with making supplies to other persons for a consideration. The activity must have a degree of frequency and scale and be continued over a period of time. Isolated transactions are not normally business for VAT purposes”

The term “business” should be interpreted consistently with the Principal VAT Directive term of “economic activity” (Article 9):

“Any activity of producers, traders and persons supplying services, including mining and agricultural activities and activities of the professions, shall be regarded as ‘economic activity’. The exploitation of tangible or intangible property for the purposes of obtaining income therefrom on a continuing basis shall also be considered an economic activity.”

Further guidance on the meaning of business can be found in the VAT Business/Non-business Manual.