I have been asked to provide advice to the owner of a restaurant regarding the sale of the business. The business is held among several companies within a large group, but the sale will not be made by way of shares: the business assets will each be sold to the purchaser. The group holds various assets of the business, including stock, tables, chairs, tills and the premises. The group companies are all registered for VAT. The purchaser is insisting that there should be no VAT charged on the supply of these assets as the sale qualifies as a transfer of a going concern (TOGC), but the position is so complex it is difficult to be certain. How can I advise?
Answer
If the vendor does not charge VAT on the sale of the assets and HMRC later disagrees, the vendor will be assessed for output tax. Care must therefore be exercised in advising the vendor. However, the TOGC rules are mandatory and there are advantages, namely savings in terms of:
cashflow;
VAT which cannot otherwise be recovered if the purchaser is partly exempt; and
SDLT where an opted property is involved.
The rules
The legislation governing TOGCs is found at VATA 1994 s 49, VAT (Special Provisions) Order, SI 1995/1268, art 5, and VAT Regulations, SI 1995/2518, reg 6. A simple summary of the criteria for TOGCs as applied by HMRC is below:
business test;
going concern test;
purchaser’s VAT registration rules;
continuity test: ‘same kind of business’;
continuity test: ‘no significant break in trading’;
condition of no consecutive transfers of business;
special rules for transferring part of a business; and
special rules for transfers involving land or property.
Providing the above tests are met, the sale of the business assets will not be subject to VAT. However, there are complexities to consider with each of these tests.
Unless it is a VAT group, each company’s business should be considered separately and the tests above applied separately to each business transfer.
Practical points to watch
Consider the position of a company which carries out all the administrative functions. If this company does not recharge administrative services to other businesses within the group, HMRC is likely to take the view that there is no business in that company; and the supply of assets will not qualify as a TOGC and VAT will be chargeable by the vendor.
Another issue to consider which can become complex is whether the purchaser of the restaurant is planning a break in trading for refurbishment, changing chefs, menus and opening times and offering a different kind of cuisine. This might appear to be both a clear break in trading and also a different business once it restarts, breaking both continuity criteria. However, the advice to the vendor must be expressed with care on this issue.
In the case of B Massey t/a The Basement Restaurant [2013] UKFTT 102 (TC), the tribunal found that a different chef, different menus, different opening times and a different cuisine did not determine that a different kind of business was being carried on by the purchaser (VAT (Special Provisions) Order 1995 art 5(1)(a)(i)). The tribunal also concluded that a ten day closure for refurbishment was not significant in the context of a long established restaurant. The tribunal stated that the test in such cases was to consider the ‘whole of the circumstances’; and context will therefore be important in advising the vendor on whether a TOGC exists.
The vendor owns its own premises in at least one of the companies within the group. The adviser should enquire whether the owner company has opted to tax this property. If it has, the sale of the property will stand outside the TOGC unless, by the date of the sale (normally completion), the purchaser has opted to tax the property and notified the vendor that the option to tax will not be disapplied. If these conditions are not completed in time, the vendor will be required to charge VAT on the supply of the property to the purchaser; and SDLT, where applicable, will be payable on the VAT inclusive price of the property.
If the property is held in a separate company and leased to a trading company, the transfer of the property must be to another company which continues to lease the property to a tenant; otherwise this leasing business will not be continued and the property will not be part of a TOGC.
Recent changes
There are also recent developments to take into account when advising. For example, in the case of Royal College of Paediatricians and Child Health [2015] UKUT 0038 (TCC), the purchaser had persuaded the vendor, prior to the transfer, to rent the property to a tenant introduced by the purchaser. Contracts were exchanged the same day that the sole tenant agreed to rent the property. The Upper Tribunal found that the vendor had no genuine business of property rental and therefore there was no TOGC. The standard rate of VAT applied to the £17.4m sale of the property.
Another recent tribunal decision considered whether the assets of a business bought by a VAT group qualified as a TOGC if the business which acquired the property only made supplies to other members of the VAT group after the purchase. Following Intelligent Managed Services [2015] UKUT 0341 (TCC), HMRC issued Brief 11/2016 confirming that the supplies between members of a VAT group existed as a matter of fact and therefore the going concern criterion was satisfied. TOGC rules applied and the supply was outside the scope of VAT. SDLT charged on the price of the properties would be reduced.
Final thoughts
Advising whether a sale of assets is a TOGC is a difficult process which must be tackled in stages. Not only must each test be considered separately, but also in detail and in light of recent developments.
I have been asked to provide advice to the owner of a restaurant regarding the sale of the business. The business is held among several companies within a large group, but the sale will not be made by way of shares: the business assets will each be sold to the purchaser. The group holds various assets of the business, including stock, tables, chairs, tills and the premises. The group companies are all registered for VAT. The purchaser is insisting that there should be no VAT charged on the supply of these assets as the sale qualifies as a transfer of a going concern (TOGC), but the position is so complex it is difficult to be certain. How can I advise?
Answer
If the vendor does not charge VAT on the sale of the assets and HMRC later disagrees, the vendor will be assessed for output tax. Care must therefore be exercised in advising the vendor. However, the TOGC rules are mandatory and there are advantages, namely savings in terms of:
cashflow;
VAT which cannot otherwise be recovered if the purchaser is partly exempt; and
SDLT where an opted property is involved.
The rules
The legislation governing TOGCs is found at VATA 1994 s 49, VAT (Special Provisions) Order, SI 1995/1268, art 5, and VAT Regulations, SI 1995/2518, reg 6. A simple summary of the criteria for TOGCs as applied by HMRC is below:
business test;
going concern test;
purchaser’s VAT registration rules;
continuity test: ‘same kind of business’;
continuity test: ‘no significant break in trading’;
condition of no consecutive transfers of business;
special rules for transferring part of a business; and
special rules for transfers involving land or property.
Providing the above tests are met, the sale of the business assets will not be subject to VAT. However, there are complexities to consider with each of these tests.
Unless it is a VAT group, each company’s business should be considered separately and the tests above applied separately to each business transfer.
Practical points to watch
Consider the position of a company which carries out all the administrative functions. If this company does not recharge administrative services to other businesses within the group, HMRC is likely to take the view that there is no business in that company; and the supply of assets will not qualify as a TOGC and VAT will be chargeable by the vendor.
Another issue to consider which can become complex is whether the purchaser of the restaurant is planning a break in trading for refurbishment, changing chefs, menus and opening times and offering a different kind of cuisine. This might appear to be both a clear break in trading and also a different business once it restarts, breaking both continuity criteria. However, the advice to the vendor must be expressed with care on this issue.
In the case of B Massey t/a The Basement Restaurant [2013] UKFTT 102 (TC), the tribunal found that a different chef, different menus, different opening times and a different cuisine did not determine that a different kind of business was being carried on by the purchaser (VAT (Special Provisions) Order 1995 art 5(1)(a)(i)). The tribunal also concluded that a ten day closure for refurbishment was not significant in the context of a long established restaurant. The tribunal stated that the test in such cases was to consider the ‘whole of the circumstances’; and context will therefore be important in advising the vendor on whether a TOGC exists.
The vendor owns its own premises in at least one of the companies within the group. The adviser should enquire whether the owner company has opted to tax this property. If it has, the sale of the property will stand outside the TOGC unless, by the date of the sale (normally completion), the purchaser has opted to tax the property and notified the vendor that the option to tax will not be disapplied. If these conditions are not completed in time, the vendor will be required to charge VAT on the supply of the property to the purchaser; and SDLT, where applicable, will be payable on the VAT inclusive price of the property.
If the property is held in a separate company and leased to a trading company, the transfer of the property must be to another company which continues to lease the property to a tenant; otherwise this leasing business will not be continued and the property will not be part of a TOGC.
Recent changes
There are also recent developments to take into account when advising. For example, in the case of Royal College of Paediatricians and Child Health [2015] UKUT 0038 (TCC), the purchaser had persuaded the vendor, prior to the transfer, to rent the property to a tenant introduced by the purchaser. Contracts were exchanged the same day that the sole tenant agreed to rent the property. The Upper Tribunal found that the vendor had no genuine business of property rental and therefore there was no TOGC. The standard rate of VAT applied to the £17.4m sale of the property.
Another recent tribunal decision considered whether the assets of a business bought by a VAT group qualified as a TOGC if the business which acquired the property only made supplies to other members of the VAT group after the purchase. Following Intelligent Managed Services [2015] UKUT 0341 (TCC), HMRC issued Brief 11/2016 confirming that the supplies between members of a VAT group existed as a matter of fact and therefore the going concern criterion was satisfied. TOGC rules applied and the supply was outside the scope of VAT. SDLT charged on the price of the properties would be reduced.
Final thoughts
Advising whether a sale of assets is a TOGC is a difficult process which must be tackled in stages. Not only must each test be considered separately, but also in detail and in light of recent developments.
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