VTOGC3300 - Article 5 VAT (Special Provisions) Order 1995: Has there been the transfer of a business or just a sale of assets - factors to consider

You should always remember that you need to weigh up all the individual factors of a case. Different factors will be more important depending upon the type of business being transferred. It is not possible to say that the presence or absence of a particular factor means that a transaction is or is not a TOGC.

The following factors are likely to be relevant in your decision. This is not a definitive list nor should it be taken as a check list but, using the general principles outlined in Zita Modes (VTOGC3600), you should consider the following points:

What the parties concerned thought was being sold and bought - consensus

The tribunal in Edward James Caunt (MAN/83/160) decided that there was no TOGC due to a change in the nature of the business after transfer. Caunt was a confectioner who purchased office furniture and stock from a business that was closing down. This decision was based on the particular facts of the case but the Chairman made the following comment which is especially useful where the seller and the purchaser are closely linked.

“For the transfer of a business as a going concern there must, in our judgement, be a consensus between vendor and the purchaser. The commonest example is where a business is advertised by a vendor for sale as a going concern … In our judgement in cases such as the present where evidence of consensus may be lacking or suspect, the expression “transfer of a going concern” must be interpreted as meaning succession by way of continuity of the previous business, succession by itself not being conclusive.”

This point was reiterated by Mr Justice Barling in Intelligent Managed Services Ltd ([2015] UKUT 0341 (TC [2015] UKUT 0341 (TCC)C))

“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.”

Stock

The transfer of stock is often a fundamental part of the transfer of a business. If a business is transferred, all or a large part of the stock is usually sold to the purchaser of the business. If all the stock is sold to a single purchaser, the seller has nothing left with which to trade, which can indicate that he has sold his business. However, this will depend on the kind of business carried on and the normal trading arrangements. The sale of a small proportion of stock is less likely to indicate a TOGC, unless the effect is to put the purchaser in possession of an identifiable business.

Premises

The transfer of premises is significant for two reasons. Firstly, some businesses are so closely linked to the premises from which they are run that if they are not transferred it is unlikely or even impossible that the business has been transferred. A property letting business obviously cannot be transferred without the property. Similarly, it would be difficult to transfer the business of a theatre, bowling alley, ice rink etc without transferring the premises. However, as with all factors to be considered, much depends on the nature of the business concerned and the overall arrangements.

The second way in which premises are important is where goodwill attaches to the premises, so that their transfer is a good indication of a TOGC. This is often the case in retail businesses where the location of the premises is significant.

RP & DK Aghnihotri (MAN/85/165) “Whether or not goodwill is expressly transferred … the focal point of goodwill is the premises to which persons may be expected to gravitate. It is this factor which inclines us in the instant matter to find the transfer of stock, coupled with a transfer of the premises, amounted to the transfer of the business of the transferors as a going concern.”

This suggests that the premises is the most important factor to consider when dealing with the TOGC of a high street retail business and may outweigh all the other factors. Despite the very close relationship between the purchaser and the seller in Bonnet to Boot (LON/95/1273A), the tribunal found that the transfer of large amounts of stock did not constitute a TOGC as the new business operated out of different premises and under a different name, and rights, obligations and goodwill had not transferred - in fact, this happened because of a downsizing of an existing business. However the fact that premises have not been transferred is not conclusive that there has been no TOGC. You should have regard to the individual facts of the case.

In the European Court of Justice (CJEU) case Christel Schriever (C-444/10), a business owned by Ms Schriever sold sports equipment. She sold her stock and shop fittings to a company ‘Sport S’. At the same time she leased the premises where the business was carried out to Sport S for an indefinite period, although both sides retained the right to terminate this agreement. She treated the sale of the stock as a TOGC and did not charge VAT.

The issue was eventually referred to the CJEU to answer whether there could be a transfer of the totality of assets (a TOGC) if the stock were sold but the premises merely leased and also whether the length of the lease had any bearing on the matter.

The Court ruled that

“the answer to the questions referred is that Article 5(8) of the Sixth Directive must be interpreted as meaning that there is a transfer of a totality of assets, or a part thereof, for the purposes of that provision, where the stock and fittings of a retail outlet are transferred concomitantly with the conclusion of a contract of lease, to the transferee, of the premises of that outlet for an indefinite period but terminable at short notice by either party, provided that the assets transferred are sufficient for the transferee to be able to carry on an independent economic activity on a lasting basis.”

Plant and equipment

If the equipment needed to carry on the business is transferred, this is an indication that there is a TOGC. However, if it is not transferred the transaction can still be a TOGC, especially if the purchaser already owns similar equipment and so does not need the seller’s equipment.

Staff

If the new business takes over the contracts of existing staff this will suggest a TOGC. However, even if the staff have been made redundant by the seller if they have been re-employed by the purchaser, this supports a TOGC. Various employment laws, in particular the Transfer of Undertakings - Protection of Employees Act (TUPE), exist to protect staff involved in takeover situations.

Royal Bank of Scotland Group PLC (EDN/01/105): In determining that a TOGC had taken place, the tribunal explained that

“The factors which weighed strongly with them … were the transfer of the whole staff … involved in the activities in question which involved consideration of and compliance with TUPE the sale of, or lease of the various properties in which these activities were carried out and the supply of the equipment and intellectual property requisite to their continuing. The intention of the parties, independent entities, also point to the desire to effect on transfer of a going concern.”

Therefore the transfer of staff (including TUPE) may be an indicator that there is no intention to liquidate the other assets of a business. TUPE arrangements on their own do not determine that a TOGC has occurred.

Business name

The transfer of the business name is the most obvious sign that goodwill has been sold. Previous customers may be drawn to the business largely because it is a name they are familiar with. It will usually mean that the business itself is being transferred and VAT tribunals have attached much weight to this factor. However if the purchaser does not take on the business name of the seller, this on its own does not mean that there has been no TOGC. Indeed, other factors can suggest the transfer of goodwill and/or a TOGC as in Shire Equip Ltd (MAN/83/52).

Shire Equip Ltd argued that the only source of goodwill in a company in liquidation was the business name, which they had not taken over. The tribunal found that as both companies had common directors, the new company had acquired all relevant knowledge about customers and therefore there was no need to transfer the name to get the goodwill.

Customer lists

The sale of a list of previous or potential customers is a good indication that a business is being sold. However, a transfer of a customer list alone is not likely to be the transfer of a business - even in the case of a service business whose only real asset of worth it may be.

Transfer of contracts

If a purchaser takes over contracts with suppliers, this is a good indication that he is to carry on the business of the seller. Similarly, if he buys work in progress or takes over obligations under contracts with customers, this suggests a TOGC.

However, not every case where the benefit of contracts is transferred will amount to the transfer of a business. A large company with more work than it can deal with may arrange with its customer, as a temporary measure, for a small job to be carried out by another person. Clearly no part of the business has really been transferred and there will be no TOGC.

It is not always possible however to transfer or assign contracts - new ones normally have to be arranged, often by way of novation. This is a tripartite agreement that requires all three parties to consent. It releases the original party to the contract from his obligations and establishes a new one between the other two. If contracts are assigned (not novated) the original supplier is still contractually obliged to fulfil the contract. In these circumstances, the purchaser is not taking on the business obligations of the seller.

Goodwill

Goodwill is a term used by different people to mean different things. In the context of selling a business it is sometimes defined as the difference between the value of a business as a whole and the value of its assets as individual items. The following factors can contribute to the existence of goodwill:

a. the relationships with customers and suppliers;

b. the reputation of the company and its product;

c. the location of the business;

d. the expertise of the workforce and management;

e. the market share obtained.

Accordingly, the transfer of business names, trademarks, premises, staff etc can affect the transfer of goodwill even if it is not expressly sold. Goodwill will usually be an important factor in your decision whilst its absence from any transfer does not imply that no TOGC has taken place, its presence normally gives a very good indication that it has. This is so even if the contract for sale attributes only a nominal value to goodwill.

In Quadrant Stationers (LON/83/32) the goodwill of the business being sold was said to be at such a low level that a value of £1 was attached to it. Despite this it was held that the fact that it was mentioned at all was a contributory factor in deciding that there had been a TOGC.

Restrictive covenant

A restrictive covenant in the contract of sale will forbid the one or both of the parties, usually the seller, from doing something. This may be that he may not trade in the same business in the same area for a fixed length of time or use the same trading style as before or forbid him from “poaching” customers. The presence of such a covenant in the contract of sale is a good indicator that a TOGC has taken place. There would be no need to protect the purchaser if his new business was not the business previously carried on by the seller.

Contract of Sale

You should always look at the contract of sale which should tell you what the parties have agreed between them is being sold. You may find on occasions that no formal contract exists. This is particularly common when the seller and purchaser are closely linked. In these circumstances minutes of board meetings may provide additional information. However, statements in a contract that a transaction is, or is not, intended to be the transfer of a going concern do not decide the matter.

It is the intention of the parties that is the main factor to consider and contracts are not always the best indicator of this.

The way the business has been advertised for sale

i) Pre sale

The way in which a sale is advertised is an indication of the vendor’s intentions. However, it is not conclusive - the vendor may originally intend to sell a going concern, but change his mind if he can get more for the assets sold separately or circumstances change.

ii) Post sale

It may be useful to look at any advertisements or other documents issued announcing the purchase. Phrases such as “Under new management” will indicate the same type of business is being carried on and there has been a TOGC.