TRANSFER OF A GOING CONCERN – VAT (Special Provisions) Order 1995, Para 5 – outsourcing of cash collections – whether TOGC – No.

LONDON TRIBUNAL CENTRE

	FMCG Home Services Ltd	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	Peter H Lawson (Chairman)
					 	M M Hossain FCA  FCIB

Sitting in public in London on 24 September 2003

D Garcia, Solicitor with Ernst & Young LLP, for the Appellant

Hugh McKay, Counsel, for the Respondents

© CROWN COPYRIGHT 2003

DECISION

1.	This is an appeal by FMCG Home Services Ltd of Principal House, 30A High Street, Thame, Oxfordshire OX9 3EX against a decision made on 13 April 2000 by Mr Goodall, a Senior Officer of the Commissioners that “supplies made between the Appellants fall outside the provisions of Article 5 of the VAT (Special Provisions) Order 1995” and the grounds of appeal were “that Customs’ decision is that the conditions laid down in Article 5(1)(b)(ii) of the VAT (Special Provisions) Order 1995 is not met.  We disagree.  The assets transferred are clearly used by the transferees in carrying on the same kind of business as that carried on by the transferor in relation to that part of the business transferred.”
2.	The appeal is against a decision of the Commissioners issued to Prudential Corporation plc on 13 April 2000 that the transfer of the Prudential’s cash collection activities to FMCG Home Services Ltd do not constitute a transfer of a going concern and output tax was due on the consideration paid by FMCG Home Services Ltd.  The Prudential Corporation plc appealed against this decision but subsequently abandoned its appeal.  The present Appellant took over the appeal.  The VAT in dispute is approximately £707,000.
3.	The factual background to this appeal is best taken from the Witness Statement of Mr John Cunningham made on 3 July 2003.  Mr Cunningham also gave oral evidence before us.  Mr Cunningham worked for the Prudential Assurance Co Ltd (“Assurance”) from July 1987 and in 1995 was asked to set up and run a new business unit called Prudential Traditional.  The Prudential plc, the ultimate parent company of Assurance, provides life assurance and other financial services.  Mr Cunningham left the employment of Assurance on 31 December 1999 and joined the Appellant company as managing director.  He left the employment of the Appellant company on 26 February 2001 and since then has been working as a management consultant.  His statement continues as follows:

"Prudential Operation
3.  From 1995 to 1999 I was the Director of the Traditional business unit, which operated separately within the Life and Pensions business unit.  The Life and Pensions business reported to the board of directors of Assurance.  Within Traditional there were three business units providing the following:
*  General insurance,
*  Bank services, and
*  Cash collection.

4.  General insurance was the sale by a dedicated sales force, of unregulated insurance products, such as building/contents and motor insurance.  The bank services involved the capture of deposits from maturing investments that could be further invested into a bank owned and run by Prudential plc.  Cash collection was the collection of premiums in relation to regulated life assurance, including industrial branch life assurance, and constituted far and away the principal element of work in the Traditional business.

5.  Industrial life assurance was a historic life assurance product, which had started out as a penny a week policy for low-income families in industrial urban areas to save for their funerals.  It was a product with a very long duration and with a very low premium, which was collected at the home of the policyholder or at the home of someone who paid on behalf of the policyholder.

6.  ......   I had overall responsibility for approximately fifty managers and eight hundred collectors whose role was to provide a regular collection service at the door for industrial branch assurance premiums.  Additionally, I had responsibility for the non-regulated sales to the Traditional customer base, which was achieved through fourteen managers and one hundred and sixty customer care representatives.  Support for the aforementioned was provided by one hundred support staff located in fourteen business centres located throughout the UK.  I managed the business through a small management team.

The collection operation was run from the fourteen business centres in the UK with a team of Customer Account Managers ("CAM") and collectors designated principally for the cash collection aspect of the Traditional business.  The CAM's duties involved the following:
*  Overall management control of an area of cash collections
*  Managing resources and workload requirements
*  Training and development
*  Collection efficiency of collection patterns
*  Ensuring all financial accounting was undertaken correctly
*  Meet field auditing standards
*  Review team member performance
*  Ensure effective communication
*  Provide leads to sales team in the business centre
The CAMs worked from one of the fourteen business centres, but three months prior to the transfer of the cash collection business to the Appellant Assurance closed all the business centres and the CAMs worked remotely from home.

7.  The customer-facing aspect of the business was the Customer Account Representative ("collector"). This was an employee, based at his home, who would visit the policyholder's home to collect the premium due.  The policyholder and the collector would organise a specific date for the collection and this would occur regularly every four to six weeks.  The payment was by cash or cheque.  During these meetings the collector and the policyholder would be able to discuss the payment situation such as the level of arrears and advance payments.  The policyholder would hold a payment book and the date and payment of premiums would be recorded in the book, and witnessed by a signature from the collector.  Given the duration of the industrial branch assurance policies the collector was a regular visitor to the policyholder's home for a considerable length of time.  During these periods the collector could, and did in a vast number of cases, become a trusted acquaintance.  The collector did not sell any products but could provide leads on non-regulated products.  Any opportunity spotting for non-regulated business stopped three months prior to the transfer to the Appellant.  The collector would ensure premiums were maintained within guidelines and company regulations and that he maintained efficient workload patterns.  Once the premium had been collected the financial data would be recorded on a hand-held electronic device called a Husky Hunter (Electronic Collecting Book) ("ECB").  The monies collected would be banked.  The data stored on the ECB was downloaded on a weekly basis to the mainframe computer at head office.  In performing his role the collector would also need to meet the client money regulations, and all the compliance standards provided in the industrial branch assurance legislation.

8.  On a daily or more frequent basis the collector would deposit the premium monies, into the Assurance account, over the counter at the Post Office.  A receipt was provided to the collector by the Post Office.  The collector would send payment details to head office and a reconciliation process occurred and all debits and credits were investigated.  Traditional also provided a service to PRU Bank, a bank owned by Prudential plc, which operated from a location in Dudley, West Midlands.  The collectors would offer customers, with a policy that was maturing, the opportunity to deposit that maturity cheque direct into a PRU Bank deposit bank account.  This activity was aborted after one year due to its lack of success.

9.  If the policyholder had a complaint about the cash collection service he could present this directly to the collector or alternatively contact by telephone the main Assurance call centre or his local business centre.  All complaints would be passed to the business centre responsible for that policyholder, and it would be logged and considered by the CAM.  It was policy that all complaints were to be acknowledged within forty-eight hours of receipt.  The complaint should have been resolved within ten working days.  The nature and level of complaints was monitored and necessary action taken.

Profitability and Business Strategy
10. My role as Director of Traditional was to form a vision and a business strategy for the future of Traditional; to prepare annual business plans and to lead the business to achieve the annual business targets and the strategic changes.

11. In the 1990's it was clear that industrial branch assurance was ceasing to be a competitive financial product in light of the explosion in the availability of personal finance advice and alternative products.  Prudential plc therefore took the decision to stop selling industrial branch assurance at the end of 1995.  However, given the duration of policy terms Assurance was still under an obligation to collect premiums from the policyholder until the policy lapsed, was surrendered or completed its term.
12.  Thus Traditional continued to undertake the collection of the premiums and this activity became the single most important determinant of the continued profitability of this line of business.  The sale of bank and general insurance products were seen as leveraging the Traditional business organisation and generating further profits.

13. The annual business plan for Traditional consisted of an expenditure budget most of which was for the collection of premiums; and a sales plan for the bank and general insurance products.  The expenditure budget was prepared to achieve a performance target of restraining the costs of collection to 18% of premiums collected.  The sales plans and associated expenditure budgets were negotiated every year with the Prudential Bank and the Prudential General Insurance business.

14.  In the year 1999 the total expenditure for Traditional was £18m; the sales plan for General Insurance totalled £3.5m of new premiums and for bank deposits some £1m of deposits.  My bonus was linked to the achievement of these targets and performance was reviewed monthly.

15.  The achievement of the annual business plan was becoming progressively more difficult.  I identified two broad strategic directions – either gradually to wind down the operations as the Industrial Branch collections business declined or to find new opportunities for the organisation to grow.

16.  A financial analysis of the continued operations option revealed that with annual efficiency improvements the business could remain profitable until 2006/2007.  From this point onwards the number of policies remaining to be collected would fall below the point at which a national collection force could be sustained on a profitable basis.

17.  My strong preference was to develop the business rather than gradually to wind it down.  In my view it was a unique asset within the Prudential that could be used to generate future profits.  I had set up the business organisation to operate as efficiently as possible.  I wanted to take advantage of this.  I examined the strengths and weaknesses of the organisation and identified opportunities for growth.  It was this work which eventually led to the acquisition of Traditional cash collection by the Appellant.
Acquisition of Cash Collection
18.  I identified three possible developments.  Firstly the Prudential collectors could be used to collect on behalf of other insurance companies who were all facing efficiency problems as their premiums declined.  Secondly the collectors could be used to undertake other similar activities on the doorstep.  Thirdly the collector force could be used as a distribution or sales network for other non-insurance products.

19.  There was a measure of support for these ideas within the senior management of Prudential but the potential scale of the proposed development was quite small compared to other more strategic developments being considered within Prudential.

20.  A decision was taken by the senior management of Prudential Plc that a third party could more effectively develop the Traditional collection business outside the Prudential.  The scale of the development would be more attractive to a smaller business; the possibility of collecting for more than one insurance company would be more likely to happen if Traditional was seen as independent of Prudential and the new company would not be constrained in looking beyond financial and insurance products.

21.  On 5 January 2000 the Appellant completed the purchase of the cash collection element of Traditional from Assurance.  The general insurance element of the Traditional business was transferred as a stand-alone operation and the banking element was stopped, prior to the transfer.  Therefore, bringing Traditional to a close.

22.  The Appellant was put in the position, through the acquisition, of being able to run the cash collection with all the collectors, staff equipment and customers and to develop my vision for growing Traditional into new business areas.  I left Prudential and joined the Appellant as its Managing Director.
Appellant's Operation
23. As Managing Director of the Appellant I was responsible for the entire operation of the company including the profit and loss of the company.  I reported to the Chief Executive Officer for the FMCG Group.  FMCG was a wholly owned subsidiary of Mosaic Group Inc which was a Canadian public company.  After the transfer of the operation from Traditional to the Appellant its only client was Assurance in its first full year. .......
24.  The management of the cash collection operation for Assurance is controlled from one office in Thame, Oxon.  A group of thirty-six CAMs manage five hundred collectors.  The job titles and responsibilities of these individuals are the same as in the Traditional business.  The ECB were passed over as an asset transfer at the time of the business transfer.  Prudential continue to own these devices.  The banking process is the same as prior to the transfer except that a reconciliation of the premium monies takes place in both the Prudential and the Appellant.  The process of management monitoring the business has been enhanced but is principally the same.  The customer complaint procedure involves the policyholder telephoning the Appellant's call centre and the complaint is logged and then categorised before being passed to a CAM for resolution.  An acknowledgement of the complaint should be provided within twenty-four hours and the matter resolved within five working days.  Therefore, the process is very similar to that provided by Traditional but with tighter deadlines.

25.  As the Appellant has acquired the cash collection operation from the Prudential it has an ongoing relationship with it to provide cash collection services.  An important element of the relationship concerns the banking arrangements of the premium monies collected.  Assurance receives bank data and reconciles this information with the Appellant's paying-in slip.  The Appellant checks the paying-in slips with the downloaded ECB data.  Financial reconciliation meetings take place on a monthly basis between the Appellant and Assurance.  These meetings are a forum to discuss financial queries and items outside the contractual tolerances.  These issues are investigated and targets for their resolution and preventative improvements are established.

26.  The Appellant has to monitor and maintain an agreed level of service for Assurance against the Service Level Agreement incorporated in Schedule VI of the Outsourcing Agreement dated 18 November 1999.  This includes the performance of collections and the monthly level of complaints.  In relation to the former, the levels of arrears and advances of premium monies are tightly measured with Assurance.  There are formal quarterly measurements of the levels of service and these are reported against a balanced scorecard (a document which enables two parties to measure performance against objectives) agreed with Assurance.  During the first six months of the Appellant's operations, up to July 2000, it was unable to meet the service standards agreed.  This was largely due to ten percent of staff leaving within the first month of business.  Since that period the business performance has gone from strength to strength and all areas of measurement have exceeded expectations.
............
27.  At end of 2000 and early 2001 negotiations with another insurance company, the Wesleyan, led to a new contract for cash collection.  A non-insurance contract was also made to provide services to the Post Office's TV licensing operation.  In February 2001 I was made redundant following a restructuring of the FMCG Group of companies."
4.	 Mr Garcia, for the Appellant, referred to the Transfer Agreement dated 18 November 1999 relating to the purchase of the industrial branch cash collections business and asked Mr Cunningham why goodwill was involved.  Mr Cunningham replied that it was important for the ability to collect cash.  Although collecting cash was falling at the Prudential, their competitors stopped later than they did.  £1 billion was being collected by others.  Although the Prudential was not selling much to those customers, there were other things they could sell them.  Catalogue companies were interested.  If you could combine the two it would a huge opportunity.  Another opportunity was the making of loans and prepaid funeral plans.  The attraction was the ability to collect cash throughout the United Kingdom, including Northern Ireland and Scotland.  Meter readers (comprising a key pad and screen) known as "Huskies" were used by collectors and a modem connected the details to Head Office.  This was “essential kit”.  A value of £500,000 was placed on the equipment and it was envisaged that FMCG would acquire ownership of the collection machines.  However, because these machines are quite difficult to replace, the Prudential was unwilling actually to sell them, just in case at a later date the cash collection business was brought back in-house.  Instead, the Prudential licensed the machines to FMCG .  The figure of £500,000 was never changed to reflect the fact that the equipment which comprised most of the £500,000 was not in fact being sold.
5.	In reply to questions from Mr McKay, Mr Cunningham confirmed that most companies in the group operated from carrying on business other than insurance, and that if cash collectors handled any other business it was with the Prudential.  Cash collection was the main thing “Traditional” did.  Its strength was in its ability to collect money.  It only became a business when the cash collection business was outsourced to the Appellant company.
6.	Mr Garcia referred to Article 5(8) of the Sixth Directive which provides: “In the event of a transfer, whether for a consideration or not, or as a contribution to a company, of a totality of assets or part thereof, Member States may consider that no supply of goods has taken place, and in that event the recipient shall be treated as the successor to the transferor.  Where appropriate, Member States may take the necessary measures to prevent distortion of competition in cases where the recipient is not wholly liable to tax.”
7.	UK domestic legislation must be construed to comply with the Sixth Directive, if possible, but a taxpayer can rely on “Direct Effect” – see Becker v Finanzamt Munster-Innenstadt [1982] ICMLR 499.  Article 5(8) is reproduced in the UK legislation as the VAT (Special Provisions) Order 1995 (SI 1995/1268) but the crucial provision is paragraph 5(1) which states: “Subject to paragraph (2) below, there shall be treated neither as a supply of goods nor a supply of services the following supplies by a person of assets of his business:-
(a)	their supply to a person to whom he transfers his business as a going concern where
(i)	the assets are to be used by the transferee in carrying on the same kind of business, whether or not as part of any existing business, as that carried on by the transferor, and 
(ii)	in a case where the transferor is a taxable person, the transferee is already, or immediately becomes as a result of the transfer, a taxable person.......
(b)	their supply to a person to whom he transfers part of his business as a going concern where
(i)	that part is capable of separate operation, 
(ii)	the assets are to be used by the transferee in carrying on the same kind of business, whether or not as part of any existing business, as that carried on by the transferor in relation to that part, and
(iii)	in a case where the transferor is a taxable person, the transferee is already, or immediately becomes as a result of the transfer, a taxable person.......
(c)	the supply shall not be treated as a supply of goods nor of services by virtue of paragraph (1) above to the extent that it consists of :
(a)  a grant which would, but for an election which the transferor has made, fall within Item 1 of Group 1 of Schedule 9 to the Act, or
(b)  a grant of a fee simple which falls within paragraph (a) of Item 1 of Group 1 of Schedule 9 to the Act
Unless the transferee has made an election in relation to the land concerned.....
8.	FMCG, Mr Garcia said, continued the core of the pre-transfer business, i.e. collecting money.
9.	Traditional took up the cash collections.  The later broadening of its activities was not relevant.  The question is whether FMCG was carrying on the same kind of business.  The fact that FMCG was not an insurance company does not determine the case.  Mr Garcia said that the transfer fell within Article 5(3) of the 1995 Order.  He referred to the opinion of Advocate General Jacobs in the case of Zita Modes SARL (Case C-497/01).  Without going into a great deal of detail from the Advocate General’s opinion, we cite the following two paragraphs: 

”36.  It follows in my view that the concept of “part of a totality of assets” relates not to one or more 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.  

37.  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 assets.  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.”
10.	Mr Garcia submitted, in the light of the Advocate General's remarks, that the character of a business can remain the same but the activity could change.  In the present case it would be a seamless change.  The activity has remained the same; the only change is the legal ownership and, in the VAT world cash collection.  If, he said, the Commissioners are right in their submission, the carve out of a business could not be a TOGC.
11.	The case of Jeyes Limited (Decision No. 10513), in which Mr Garcia appeared for the Appellant, concerned disposal of the production of bottles, the blow moulding business.  Bottles had been manufactured “in house” by Jeyes Limited.  Although this activity was costed separately from other activities such as transport, packaging and the production of the primary products, the manufacturing was by Jeyes Limited itself and not by a separate subsidiary.  Before the sale of the blow moulding group, its activities were regarded as an integral part of the overall business of Jeyes.  The sale was to a wholly independent company but had unusual features.  The purchaser acquired a factory next to Jeyes, it bought the plant and equipment but not the moulds in which the bottles were made and the new factory was connected by a conveyor belt with Jeyes’ main plant.  Employees of Jeyes engaged in blow moulding and became employees of the purchaser with an indemnity, if redundancies arose through insufficient orders by Jeyes.  The question was whether the transfer fell within the then operative provision, Article 12 of the VAT (Special Provisions) Order 1981.  The important point which arose in this case is that the Commissioners apparently contended that because the purchaser carried out the blow moulding process operation, but the Appellant did not, it could not be the same kind of business.  The Tribunal did not agree.  The Tribunal stated that the requirement that the part of the business transferred be capable of separate operation clearly implies that the part transferred may not be a separate operation before transfer.
12.	Mr Garcia said that the lesson learned from the Jeyes case is that a vertically integrated business can transfer a recognised activity.
13.	Mr Garcia went on to refer to the well-known case of Kenmir v  Frizzzell [1968] 1WLR 329 in which the QBD held that in deciding whether a transaction amounted to the transfer of a business regard must be had to its substance rather than its form and consideration must be given to the whole of the circumstances, weighing the factors which pointed in one direction against those that went in another, but that in the end the vital consideration was whether the effect of the transaction was to put the purchaser in possession of a going concern which he could carry on without interruption.
14.	A further case cited by Mr Garcia was The Royal Bank of Scotland Group plc, a decision of the Edinburgh Tribunal (Decision No. 17637) released on 24 April 2002.  It concerned the outsourcing of clearing services by The Royal Bank of Scotland Group plc following its acquisition of National Westminster Bank plc which became a member of the RBS Group registration with effect from 1 April 2000.  The clearing services were transferred to a company called Electronic Data Systems Limited.  NWB transferred to EDS about 1,400 employees wholly or mainly engaged in NWB clearing.  The transfer of employees took effect under the Transfer of Undertakings (Protection of Employment) Regulations 1981 as amended.  Until the date of the transfer all the assets referred to and all the employees referred to were used by NWB in carrying out NWB clearings.
15.	Neither NWB nor any relevant associated company of NWB elected to waive exemption from VAT in respect of any property referred to.
16.	Following the transfer, EDS carried out, as part of its existing business, the cheque processing and clearing operations previously carried out by NWB as part of its business.
17.	In the RBS case, it was argued that the intention of the parties, i.e. RBS and EDS, was of relevance and important.  Those intentions were spelled out in the preamble to the Sale and Purchase Agreement as follows:

”NWB has agreed to enter into an agreement with EDS for the provision of certain clearing services and the acquisition of the undertaking of NWB which deals with clearing services.  EDS requires certain of NWB’s assets, properties and employees in order to provide NWB with such clearing services and NWB has agreed to transfer and/or lease or, in the case of equipment, procure the hire purchase of these assets, properties and such undertaking to EDS on the terms set out or referred to in this Agreement.”  

In addition, the Tribunal’s decision referred to the following additional factors as being of importance and clearly pointing to a transfer of a going concern:

1.  The manifest intentions of the parties
2.  The transfer of the necessary equipment for carrying out the operations and the sole use for that purpose.
3.  The transfer of the necessary manuals without which the equipment could not be operated.
4.  The transfer of benefits and burdens of the contracts relating to the assets.
5.  The transfer of the claims relating to the assets.
6.  The transfer of the key contracts without which the operations could not be carried out.
7.  The licence (and possible subsequent transfer) of the intellectual property (which could only be utilised by EDS, in carrying out the operations).
8.  The transfer of the properties.
9.  The transfer of dedicated staff under TUPE.
10.  Covenants up to completion and apportionment provisions.
11.  No interruption in the operations.
12.  Transfer of work in progress.
13.  The part of the cheque and voucher clearing and processing business was both capable and in fact operated as a free-standing business.
14.  RBS had an option to buy-back the business but staff did not automatically revert to RBS/NWB under TUPE.
18.	Major compelling factors were the transfer of the moveable property, the licensing agreement and the transfer of over 1,000 employees in compliance with the Transfer of Undertakings (Protection of Employment) Regulations.
19.	Mr Garcia pointed out that, of the items listed above, items 9, 12 and 13 were similar to the corresponding items in the present case.  As to the sentence beginning at line 16 on page 12 of the RBS Decision, to the effect that major compelling factors in favour of a TOGC were the transfer of moveable property, the licensing agreement and the transfer of over 1000 employees in compliance with TUPE, the position in the RBS case was identical to that in the present case.
20.	We have already referred (para 9 above) to paragraphs 36 and 37 of the opinion in the Zita Modes case and the opinion of the Advocate General, but paragraphs 40 and 41 are also relevant.  Council Directive 2001/23/EC (para 40) defines a “transfer of an undertaking, business or part of an undertaking business” as a “transfer of an economic entity which retains its identity, meaning an organised grouping of resources which has the object of pursuing an economic activity, whether or not that activity is central” and para 41 states “that letter definition which was already in Council Directive 98/50/EC reflected the Court’s case law in Spijkers and Randmond Stichting to the effect that the decisive criteria for establishing the existence of such a transfer is whether the entity in question retains its identity, as indicated in particular by the fact that its operation is actually continued or resumed, and it is necessary for that purpose to look at all the characteristics of the transaction, including the type of undertaking or business, whether or not its tangible assets are transferred, the value of its intangible assets, the extent to which staff are taken over by the new employer, whether customers are transferred, the degree of similarity between the activities carried on before and after the transfer, and the period, if any, for which those activities were suspended – all those circumstances being, however, merely individual factors in the overall assessment.”
21.	Mr Garcia also referred to the European case of Sűzen.[1997] AWL ER (EC) 289.  At paragraph 6 the Advocate General said that “it is also apparent from the Court’s case law that an ancillary facility in an undertaking (e.g. Mr Garcia said, outsourcing), when the service it provides is entrusted to a third party, it takes on for that reason alone an independent economic and functional identity in its own right, and the activity so classified is brought within the relevant category for the purposes of the Directive.”  It is clear, Mr Garcia said, that in this case one must look at the substance, i.e. the economic reality and not the form.
22.	At page 6 the Advocate General said: “At the very least, a transfer must ... involve the actual transfer of tangible or intangible assets, always evidently on the voluntary basis of the relationship which must exist between transferor and transferee.  Any other criterion, such as the mere pursuit of the activity previously carried on by another undertaking, without any assets or rights being transferred, is not sufficient to distinguish the two situations involved (see Rygaard v Stro Molle Akustik Case C48/94 [1995] ECR 1 – 2745.  Instead the converse is true.  The transfer from one individual to another of tangible or intangible assets, coupled with the pursuit of the activity in question can undoubtedly constitute the decisive factor when it comes to establishing whether the conditions for the application of the Directive are fulfilled.
23.	At paragraph 17 the Advocate General said: “It must also be noted that although the transfer of assets is one of the criteria to be taken into account by the national court in deciding whether the undertaking has in fact been transferred, the absence of such assets does not necessarily preclude the existence of such a transfer (see Schmidt [1994] ECR 1 – 1311 and Merckx [1996] ALL ER (EC) 667 paragraph 21.  As pointed out in paragraph 14 of this judgment, the national court in assessing the facts characterising the transaction in question, must take into account among other things the type of undertaking or business concerned.  It follows that the degree of importance to be attached to each criterion for determining whether or not there has been a transfer within the meaning of the Directive will necessarily vary according to the activity carried on, or indeed the production or operating methods employed in the relevant undertaking, business or part of a business.  Where in particular an economic entity is able, in certain sectors, to function without any significant tangible or intangible assets, the maintenance of its identity following the transaction affecting it cannot, logically, depend on a transfer of such assets.”
24.	The last case referred to by Mr Garcia was Alderson and Others v Secretary of State for Trade and Industry [2003] EWHC 452.  The main question in this case was whether a local authority could carry on a function “in the nature of a commercial venture”.  We do not regard the case as being of assistance in the present appeal and we shall not refer to it further.
25.	Mr Garcia referred to the recital in the Asset Transfer Agreement dated 18 November 1999 which said:

”As part of the arrangements relating to the Outsourcing Agreement ... Prudential has agreed to sell the assets and the business as a going concern to Home Service and Home Service has agreed to purchase the assets and the business as a going concern and are subject to the terms of this agreement.”
26.	In the case of RBS we were not provided with a copy of the Sale and Purchase Agreement signed by NWB and EDS on 28 November 2000 but the Tribunal decision lists (on page 5) the assets transferred by NWB to EDS, being six in number.  We do not propose to comment on the RBS decision in detail as it is readily available, but the Tribunal in that case had no hesitation in coming to the view that the circumstances there amounted to the transfer of a going concern.  The factors which weighed strongly with them in that regard were the transfer of the whole staff of NWB involved in the activities in question, including consideration of, and compliance with TUPE, the sale 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 intentions of the parties, independent entities, also pointed to the desire to effect a transfer of a going concern.
27.	We turn now to Mr McKay’s submissions on behalf of the Commissioners.
28.	Mr McKay put forward two simple reasons why the transfer of assets from the Prudential to the Appellant was not within Article 5(1)(b) of the 1995 Order.  These were, first, that no business was transferred as a going concern because none existed prior to the time of the transfer of the assets – see the opening words of Article 5(1)(b).  The second reason was that the assets are used by the Appellant company in carrying on the business of collecting sums of money.  The Prudential carries on the business of an insurance company.  Accordingly, the assets are not used in carrying on the same kind of business as the transferor’s business.
29.	It is necessary to analyse the nature of the activities carried on by the Prudential and the Appellant company respectively.  The doorstep collection of sums of money by the “man from the Pru” is, Mr McKay said, part of the method by which the Prudential carried on its business of insurance, but it was never a separate business in itself, nor was it carried out in the manner of being a separate business.  It is essential to the notion of a transfer of a business as a going concern that the business which is a going concern is transferred.  This means, he submitted, that the business must have existed, and be identifiable as such at some moment before the time of the transfer.  He asked the Tribunal to scrutinise the activities of the Prudential and examine what part “the man from the Pru” played in those activities.  He invited the Tribunal to conclude that no separate business existed during that period.  The business was not so much transferred as a going concern by the arrangements as actually brought into being for the first time.  If that is correct, it is not within Article 5(1)(b).
30.	Further, Mr McKay submitted that the hallmark of a “business” is that it makes supplies.  There were no supplies made in this case prior to the transfer – which is to be expected given the qualitative difference between the activities prior to the transfer and the activities that followed the transfer.  Until the transfer took place the activities were merely part and parcel of how the Prudential carried on its insurance business.  After the transfer they became the business carried on by the Appellant company.
31.	The Prudential is an insurance company.  It writes policies of assurance, especially life assurance.
32.	The Appellant company is not an insurance company; it is a company that collects sums of cash from members of the public.  The two kinds of activities are very different and accordingly it cannot be said that the Appellant company and the Prudential used the assets transferred by the Prudential in carrying on the same kind of business.  Therefore, the provisions of Article 5(1)(b)(ii) are not satisfied.  The transfer must not itself be the birth of the business.  One must be able to point to an existing business; if there is no existing business there is just a transfer of assets.  Mr McKay asked us to treat the Zita Modes case with caution, especially paragraph 20.  It was an opinion, basically, of the Advocate General and not, of course of the ECJ.
33.	Mr McKay submitted that the Appellant fails at the first hurdle.  The position was not so carefully examined in the Jeyes and RBS cases as they have been in the present case.
34.	There are two extremes, first debt collecting for commission, which is a business and secondly, at the opposite end, the vending machine in the basement which is passive for cash collections.  It is fanciful to say that cash collection is an economic activity.  Collection of money is part of the economic activity, but the debt collector is free standing.  Cash collecting is not, he submitted, a separate economic activity.  Cash collection by the “man from the Pru” was not an economic activity (compare the coffee machine).  It is an activity but not an economic activity.  Mr Cunningham agreed that FMCG only became a business at the time of the transfer.  Mr Garcia had relied on Article 5(8) of the Sixth Directive and on the Advocate General’s views on the Zita Modes case.  However, the opinion was unconfirmed and was opposite to the opinion he had given two years earlier in the Abbey National case [2001] STC 299 (ECJ).  The words of the UK legislation are clear.  There is nothing to displace them in the European cases.
35.	In reply Mr Garcia said that paragraph 42 of the Zita Modes decision was not what he had had in mind.  Paragraph 28 of the Abbey National decision (page 304) where both parties agreed that there was a TOGC, showed that the solution adopted in the UK was a reasonable one, although it was opposite to that in Zita Modes.  The Abbey National case was not about a TOGC and had the benefit of full argument.
36.	The Royal Bank of Scotland case is similar to this case.  If  a criterion is that you must be carrying on the same business after the transfer as before the transfer, they are very similar.  
37.	The cash collection was not a business activity, it was just part of one.  You cannot have consideration within a single business.  The important point is that there was an economic activity both before and after the transfer.
38.	We come to our conclusions.
39.	Since April 2000 the Commissioners have consistently maintained that the transfer of the Prudential’s cash collection activities to the Appellant company did not constitute a transfer of a going concern (and output tax was accordingly due on the consideration paid by the Appellant company).  Initially, Mr Goodall, a senior officer, stated that on the basis of the information supplied by Prudential, the transaction could not be treated as a TOGC as the Prudential’s assets, prior to the transfer to the Appellant, were used by the Prudential to make supplies of insurance, whereas the Appellant, on transfer of the assets, would be using the assets to collect cash on premiums.  These were two different business activities and, accordingly, the transfer could not be classified as a TOGC.  Following a meeting on 29 January 2001 Mr Hartshorn confirmed that the Commissioners’ view was unchanged.  Following a letter dated 4 July 2001 written by Mr Allen of Ernst & Young to the Commissioners on behalf of the Appellant, stating that the assets/liabilities/employees that were transferred became a business that the Appellant now operates, Mr Hartshorn responded on 23 August 2001 stating that it was not enough to say that the part of the business transferred was capable of separate operation after the transfer; it must have operated as a separate business or business unit before the transfer.  The Commissioners regarded the Prudential's cash collection activity prior to the transfer as an overhead of the Prudential's insurance business and not a business in its own right.  The activities of the cash collectors did not materially affect the situation.  The business of Prudential not only involved the selling of products and the collection of premiums but also included various other activities such as the investment of premium income and payment of claims and benefit.  Additionally, the computer database and much of the associated computer hardware remained the property of the Prudential.  The personnel now employed by the Appellant company performed some of the activities that constituted the Prudential’s business but was not carrying on a business in its own right.  Mr Hartshorn, therefore, upheld the decision.
40.	Notice of Appeal was given on 12 May 2000.  Two days before that the Prudential provided a number of reasons in support of its contention that the transfer was a TOGC as follows:
(a)	The cash collection was an integral part of the Prudential’s business.
(b)	It was accepted that the Prudential's business consists of assurance of human life that includes the collection of premiums.  It is only the business activity in relation to the part transferred that needs to be considered for the purposes of TOGC relief;
(c)	The cash collection activity is capable of being operated as a separate business;
(d)	The cash collection is a business within a business that does not generate income directly, it does so indirectly;
(e)	The costs of collecting the premiums is factored into the price paid by the final customer;
(f)	Consequently the cash collection business that operates as a stand-alone function is an integral part of the Prudential's overall business and a cost component in the business cycle;
(g)	What is being transferred is the assets necessary to allow the Appellant to carry on the same kind of business operated by Prudential;
(h)	The policy holders will continue to have premiums collected by 'door to door' collectors who will be the same collectors as the Prudential's employees have been transferred to the Appellant;
(i)	In transferring the cash collection activity, the Appellant has stepped into the Prudential's shoes.  From a customer's point of view nothing has changed as materially all things remain the same except that the Appellant now undertakes the activity.
41.	After that, the Commissioners accepted that the cash collection activities of the Prudential’s business, so far as they are related to its business, were carried out in furtherance of that business.  As these activities did not include the making of supplies, it was not considered that the sale of the assets that the Prudential devoted to the cash collection activities could of itself constitute the transfer of part of the Prudential’s business as a going concern.  They were doing no more than transferring part of the assets of the concern.
42.	The Commissioners disputed that to qualify for a transfer of a going concern, part of the business being transferred must simply be capable of separate operation after the transfer.  The Commissioners contended that it must have operated as a separate business or business unit before the transfer and must be clearly recognisable as such to qualify as a transfer of a going concern.  The cash collection activity of the Prudential prior to its outsourcing to the Appellant was an overhead of the Prudential’s insurance business and not a business in its own right.
43.	In order for the transaction to be regarded as a TOGC the Commissioners contended that the assets subject to the transfer must be used by the transferee in carrying on the same kind of business as that carried on by the transferor.  As the transferred assets were originally used by the Prudential to make supplies of insurance but were now used by the Appellant company to collect cash, this was a different activity which did not qualify as a TOGC.
44.	Our conclusion is that the Commissioners’ views as expressed in correspondence and as put before us by Mr McKay have been correct throughout.  The appeal is, therefore, dismissed and there will be no direction as to costs.
45.	We would like particularly to thank Mr Garcia for his assistance in reviewing all the relevant Tribunal and High Court Decisions and European cases including Opinions of the Advocate General.

PETER H LAWSON
CHAIRMAN

RELEASED:

LON/00/529