20855

Transfer of going concern:  Value Added Tax Act 1994 Section 49:  Value Added Tax (Special Provisions) Order 1995 SI 1995/1268:  Transfer of Tenants Fixtures and Fittings to Landlord:  Unusual commercial transaction.

EDINBURGH TRIBUNAL CENTRE

	J & S PUBS LTD	Appellant(s)

	- and -

	THE COMMISSIONERS FOR 
	HER MAJESTY’S REVENUE & CUSTOMS	       Respondents

			Tribunal:	 (Chairman):  J Gordon Reid, QC., F.C.I.Arb.,
					 (Member):     Ian M P Condie, CA

Sitting in Edinburgh on Wednesday 8 October 2008

for the Appellant(s)	Mr Samuel McKeen

for the Respondents	Ms Julie Strachan, Shepherd + Wedderburn, LLP

© CROWN COPYRIGHT 2008.

DECISION

Introduction
1.	This is an appeal against the refusal to allow a repayment claim of £14,468.30.  The appeal, heard at Edinburgh on 8th October 2008, concerns the question whether a transfer of a going concern occurred when the fixture and fittings of a business were sold to the Appellants.  The Appellants were represented by Samuel McKeen, one of the two shareholders of the Appellants.  He gave evidence on oath.  The Respondents (“HMRC”) were represented by Julie Strachan, solicitor, Shepherd & Wedderburn, Solicitors, Edinburgh.  She led the evidence of Norman Mutch, an experienced Higher Grade officer with HMRC.  Two bundles of productions were lodged by HMRC.

Legislation

2.	Section 49 of the Value Added Tax 1994 provides inter alia that where a business (or part of a business) carried on by a taxable person is transferred to another person as a going concern then for the purpose of determining whether the transferee is liable to be registered under the 1994 Act he is treated as having carried on the business before as well as after the transfer and the supplies by the transferor are treated accordingly.  Thus in effect, the transferee acquires the transferor’s trading history.

3.	The Value Added Tax (Special Provisions) Order 1995 SI 1995/1268 provides as follows:-

“5(1) Subject to paragraph (2) below, there shall be treated as neither 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 out the same kind of business, whether or not as part of any existing business, as that carried on by the transferor ......”

Facts

4.	The Appellants were established in 2003.  Mr McKeen and his wife were the directors and shareholders.  In 2005, the Appellants purchased the Dolphin Hotel, North Street, Eymouth.  Mr and Mrs McKeen stood down as directors, being replaced by Mr McKeen’s daughter, and his step-son.  Around that time the Appellants entered into some sort of arrangement with Mr McKeen in relation to the Dolphin Bar, which was a bar within the Hotel, or the whole Hotel.  The effect of the arrangement was that Mr McKeen ran or purported to run the bar on his own account.  There was also a similar arrangement entered into either between the Appellants and Mrs McKeen in relation to the remainder of the hotel, or between Mr McKeen and Mrs McKeen.  These arrangements were said to be leases or lease and sub-lease.  Each was said to be for five years, but no lease or sub-lease documents were produced.  

5.	Whatever the nature of these arrangements, Mr McKeen formally ran the Bar and his wife ran the remainder of the hotel as a guest house.  A further part of the arrangement was that Mr McKeen purchased the whole fixtures and fittings of the hotel from the Appellants.  No documents were produced vouching this unusual commercial transaction.

6.	Mr McKeen was registered for the purposes of VAT.  He was an experienced publican and ran a number of public houses in Edinburgh between about 1995 and 2005.  He was sequestrated in about 1997 and obtained his discharge in 2001.

7.	In 2006 he had further financial problems.  He decided to sell the fixtures and fittings back to the Appellants.  The purpose was to reduce the amount of rent due by him to the Appellants.

8.	A typed invoice, but with its date added in manuscript (12/8/06), bears to show that Mr McKeen, trading as the Dolphin Bar, sold the fixtures and fittings at the hotel to the Dolphin Hotel, which we take to mean the Appellants, for the sum of £82,676.00 plus VAT of 14,468.30 i.e. a total sum of £97,144.30.  Appended to the invoice is a detailed list of fixtures and fittings within the hotel.

9.	Mr McKeen’s estate was sequestrated again on or about 23rd August 2006.  His wife’s estate was sequestrated on or about 14th August 2006.  The “lease” arrangements came to an end on or about 29th August 2006, and the Appellants began trading as a hotel with a licensed bar on or about 1/9/06.  Mr McKeen was appointed manager.  At that stage, the Appellants had not sought to be registered for the purposes of VAT.  To all intents and purposes, the same business was being carried on in September 2006 under the name Dolphin Hotel, under the same management and with the same staff, as in August 2006.  There was no difference in substance.  The same fixtures and fittings were being used.  The stock was also transferred.  The business being carried on at the hotel did not cease trading temporarily in August 2006 at any stage.

10.	At some point in 2006 prior to August, HMRC inspected Mr McKeen’s books and records and the operation of the business at the Dolphin Hotel.  HMRC considered that the hotel/guest house business was artificially separated from the Dolphin Bar and so advised Mr McKeen in December 2006.

11.	Mr McKeen discussed matters with his accountant in January 2007.  It was accepted that the there was only one business and the accounts were re-written.  An application (dated 15/1/07) to register the Appellant for the purposes of VAT with effect from 1/9/06 was made on behalf of the Appellants. The application described the Appellant’s business as a licensed bar, hotel with guest rooms and restaurant facilities.  The reason for registration was stated to be that the taxable turnover had gone over the registration threshold in a period in the previous twelve months.  The application was duly granted.  The first return period was between 1/9/06 and 30/4/07.  

12.	Following the submission of the first return there was correspondence and a meeting with HMRC on 14/6/07.  By letter dated 19/6/07 to the Appellant the repayment claim in the return was refused insofar as it related to the transfer of the fixtures and fittings.  The amount in dispute is therefore the said sum of £14,468.63.

13.	The Appellants requested that the refusal of the repayment claim be reconsidered.  Mr Mutch carefully considered the information and material available to him.  In his letter to the Appellants dated 19/3/08, he took the view, particularly as there was continuity of trading or resumption of trading very shortly after the transfer of the assets, that the claim should be refused.

14.	Mr McKeen has not accounted to HMRC for the output VAT on the sale of the fixtures and fittings in respect of which the Appellants have made a repayment claim.  An estimated statement of his affairs as at 17/7/06 shows liabilities exceeding assets by about £113,270.

Grounds of Appeal

15.	These are that “a transfer of a going concern (at the date of supply and tax point) did not occur therefore the VAT paid on fixtures and fittings should be reclaimed as per 04/07 return”.

Submissions

16.	The Appellant’s argument was that, as at the tax point on the invoice relating to the transfer of assets back to the Appellants, there was no intention to trade.  He emphasised this point and referred to various HMRC Notices.  The Notices do not however assist his cause.

17.	For HMRC, Miss Strachan submitted that the evidence showed a smooth transition of the whole business from Mr and Mrs McKeen to the Appellants, who took over the stock, the trading name, the goodwill and the staff.  The substance of the business did not change.  She referred us to Kenmir v Frizzle & Ors 1968 1 AER 414, C&EC v Padglade Ltd 1995 STC 602, MacPherson v C&CE 26/4/03 EDN/92/315 Chairman RA Bennett CBE Q.C. Montrose DIY Ltd v C&CE 2/3/88, EDN/87/98 and Winterthur Swiss Insurance Co 5/2/06 LON/03/0827 and to the statutory provisions mentioned above. 

Discussion

18.	We found Mr Mutch to be reliable and credible.  He is a very experienced officer and gave his evidence in a restrained and professional manner.  Mr McKeen gave his evidence in a logical and succinct manner.  However, we regret to say that we were suspicious of the genuineness of some of the commercial transactions of which he spoke.  Given the shareholdings and directorships of the Appellants the transactions under consideration can hardly be described as transactions at arm’s length.  Mr McKeen produced no documentation to vouch the initial transfer of assets from the Appellants to him.  Such an arrangement with a tenant (assuming he was actually a tenant) was an unusual one in the view of the accountant member of this tribunal.  Moreover, nothing was produced to vouch the five year leases.  The leases were not produced; nor were any rent receipts.  When he gave evidence, Mr McKeen seemed to speak of two separate leases, one granted to him by the Appellants and one granted to his wife by the Appellants.  However, in his closing submission he said that he granted a sub-lease to his wife.  The invoice for the sale of fixtures and fittings bears a manuscript date, so could have been prepared at any time.

19.	However, giving the Appellant the benefit of the doubt on all of these matters does not assist.  It is abundantly clear, taking a broad view of the circumstances as a whole, that the overall intention of all concerned was to transfer the business and assets of whatever business Mr McKeen was actually running on his own account to the Appellants to shelter them from his creditors who were once more closing in and to enable the business to continue to trade in corporate form free of the demands of Mr McKeen’s creditors.  The same applies to Mrs McKeen insofar as she was purporting to run a separate business.  It plainly must have been the intention of the Appellants, as transferee, to operate the business transferred directly or indirectly.  That is what they did.  

20.	There was no evidence that the intention was to liquidate the activity concerned and sell the stock.  Following the transfer of assets, the same business was carried on i.e. the bar and guest house.  The Appellants were liable to be registered for VAT as from 1/9/06 (and probably before then) as it was subsequently recognised.  All the ingredients of a transfer of a going concern were present.  In these circumstances, VAT should not have been charged by Mr McKeen in the 12/8/06 invoice.  Nor should the amount of VAT have been deducted from whatever sums were otherwise due by Mr McKeen to the Appellants.  No sum was thus actually paid to Mr McKeen and in evidence he stated that he has not accounted to HMRC for the output VAT on that invoice. 

21.	In the foregoing circumstances, it is unnecessary to embark on a detailed analysis of the authorities to which we were referred.  We note, however, the emphasis given in Kenmir (followed in McPherson, Montrose DIY Ltd and Winterthur) to substance over form.  The approach in Padglade was to take a broad view of the circumstances as a whole and to have regard to the true intention of both the transferor and the transferee.  In that case, like the present appeal, the transferor and transferee were connected.  However, in Padglade, the factual finding was that the transaction did not have the flavour of the transfer of a business as a going concern.  Here, it most certainly did have such a flavour.

Result

22.	The appeal is dismissed.  Miss Strachan sought expenses on the basis that the transactions were not genuine.  However, the genuineness of the transactions was not discussed in any detail in the evidence.  Although we have our suspicions, we were able to decide the issues on the basis that such relevant transactions as were referred to in evidence actually occurred.  In these circumstances, the proper course is to give effect to HMRC’s standard approach to such appeals and to find no expenses due to or by either party.

J GORDON REID, QC., F.C.I.ARB.,

CHAIRMAN

RELEASE:  4 NOVEMBER 2008

EDN/08/75