[2013] UKFTT 226 (TC)
TC02640
Appeal number:
TC/2012/02863
VAT – INPUT TAX – Article 5
of VAT (Special Provisions) Order 1995 – sale of printing machinery and office
equipment to appellant not to be treated as a supply of goods on basis the
seller of the machinery and equipment had transferred its business as a going
concern to the appellant - – appeal dismissed
FIRST-TIER TRIBUNAL
TAX CHAMBER
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H Q GRAPHICS
LIMITED
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Appellant
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- and -
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THE
COMMISSIONERS FOR HER MAJESTY’S
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Respondents
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REVENUE &
CUSTOMS
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TRIBUNAL:
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JUDGE SWAMI RAGHAVAN
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MICHAEL BELL ACA CTA
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Sitting in public at 45 Bedford Square, London on 23 August 2012
Howard Moss, chartered
accountant of Kingswood Chartered Accountants for the Appellant
Lynne Ratnett, Officer of HMRC
for the Respondents
© CROWN COPYRIGHT
2013
DECISION
Introduction
1.
This appeal relates to HMRC’s decision to disallow the appellant’s input
tax claim on an invoice for the sale of machinery from Nowelle Ltd t/a Graf
(“Nowelle”) to the appellant.
2.
The Respondents argue that the sale of machinery to the appellant was a
supply to a person to whom Nowelle had transferred its business as a going
concern. Under Article 5 of the VAT (Special Provisions) Order 1995 the
purchase cannot therefore be treated as a supply of goods.
3.
The appellant says there was no transfer of business as a going concern
between Nowelle and itself. There was simply a transfer of the machinery.
Evidence
4.
We had before us a bundle of documents. This included correspondence
between the parties, the invoice relating to the machinery, VAT forms in
relation to the appellant and Nowelle, PAYE End of Year returns showing staff
employed for the appellant and Nowelle, details of equipment leased by the
appellant from HSBC, and bank statements of Harlequin Design (London) Limited
(“Harlequin”), a company who had controllers in common with the appellant and which
was also a customer of Nowelle and the appellant. At the hearing we also
received copies of draft accounts for Nowelle for the period ended 6 May 2011
and a copy of the Statement of Affairs on the 23 June 2011 being the date of
the resolution winding up Nowelle.
5.
For the appellant we heard oral evidence from Mr Moss in the course of
his submissions. HMRC were able to ask cross examine this and the Tribunal
asked further questions. Mr Moss is a partner in Kingswood Chartered Accountants
the accountants who acted for Nowelle and the appellant as well as other
associated companies. As well as assisting with payroll he gave accountancy
advice to the various companies.
6.
For the Respondents we heard oral evidence from Mr Shawn Dhaliwal, the
HMRC Officer who issued the decision letter of 26 September 2011 against which
the appellant appealed. Mr Moss was able to ask questions in cross examination
on this evidence.
Law
7.
Section 5(3)(c) of the VAT Act 1994 enables the Treasury to provide by
order with respect to any description of transaction that it is to be treated
as neither a supply of goods nor a supply of services.
8.
Article 5 of the VAT (Special Provisions) Order 1995 which is made under
that power 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 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…”
Cases
9.
We were referred to:
Kenmir v Frizzell & Others [1968] 1 All
ER 414
Background and Facts
10.
Background facts relating to the appellant’s application for VAT
registration and the procedural history to the appeal were agreed between the
parties and where relevant have been included within our findings of fact.
11.
We found both the witnesses Mr Moss and Mr Dhaliwal to be credible. In evaluating
Mr Moss’s evidence we took into account that he was an advisor to the company rather
than someone who made business decisions for it. Direct evidence about the operation
of the business and its business decisions would have been preferable but no
directors or managers from the appellant or the seller Nowelle attended.
Nevertheless we were able to make relevant findings of fact on the basis of Mr
Moss’s evidence. It was clear to us he had a close and ongoing professional
relationship with the companies. He was knowledgeable about the business
operation of Nowelle, the appellant and the other associated companies and was
aware of the rationale for their strategic business decisions.
12.
There was no significant disagreement between the parties as to the
factual circumstances surrounding the sale of the machinery and equipment. The
issue between the parties was whether the circumstances amounted to a transfer
of business as a going concern for the purposes of the relevant legislation. From
the documentary evidence before us and the evidence of Mr Moss and Mr Dhaliwal
we found the following.
13.
The input tax which is the subject of this appeal relates to assets sold
by Nowelle to the appellant on 4 May 2011. It is necessary to set out the
background to the seller and buyer of the assets and to explain what activities
each were carrying out around the time of the sale of the assets.
The seller - Nowelle
14.
Nowelle was incorporated on 30 November 2005. Its business was printing
and in particular it serviced retailers providing them with large format and
high quality banners advertising sales and promotions. Its customers included
Selfridges and Marks & Spencers. Printing was digitised and different
printers were needed to produce the different sizes of materials. The company
employed staff who were skilled in operating the machines and also staff who
involved in boxing / packaging materials and carrying out administration.
15.
The company was registered for VAT on 22 March 2006. Its business
address was Unit 6, IO Centre, Hatfield, AL10 9EW.
The run-up to sale – state of business / invoices
16.
Nowelle was profitable in the years 2006 to 2009 however the change in
economic climate resulted in fewer orders and in 2010 the company started to
make losses. In 2011 the director was concerned that the business was running
into difficulties. Trading in January to March of the year was weak and in late
April there was a concern that the company was not going to be able to pay its
debts as they fell due.
17.
We noted the following from the schedule of output tax in the bundle for
the period 1 April 2011 to 6 May 2011.
18.
The turnover was in the region of £16/17,000.
19.
As well as the sale of the machinery on 4 May 2011 which is the subject
of the input tax claim which is the subject of this appeal the next most
significant sum at £11,481 was an invoice dated 30 April 2011 for “jobs for
the month – april 2011”. Mr Moss explained this related to work invoiced to
Harlequin. There was also a sum of £3,241.40 for work done for the retailer Hackett
and some much smaller sums for work done for Ralph Lauren. Those invoices were
also dated 30 April 2011.
20.
Mr Moss told us the Harlequin invoice was reflective of previous invoices
that would have been issued to Harlequin. He thought the jobs referred to on
the invoice would have most likely been done during the period of the month.
Nowelle’s practice was generally to invoice for jobs towards the end of the
month.
21.
The schedule of output tax also records for 4 May 2005 an amount of £1,000
in respect of “Sale of Stock as agreed at close of business today.”
22.
No significant business activity was undertaken by Nowelle in May 2011
and on 23 June 2011 a resolution was passed winding up Nowelle.
The buyer – HQ Graphics Limited
23.
Mr Moss told us the perception was that Nowelle had run into
difficulties because of the significant labour costs associated with larger
print runs. The business owners wanted to have a business which was less labour
intensive, did smaller print runs and tenders on line.
24.
HQ Graphics was incorporated on 14 April 2011.
25.
A Form VAT 1 Application for Registration to HMRC signed 21 April 2011
by Mr Derek Wallis, director the appellant was received by HMRC on 3 May 2011.
26.
The VAT 1 showed its business address was stated as being 4th
Floor, 26/27 Great Sutton Street, London EC1V 0DS. It was a voluntary registration
with the appellant intending to make taxable supplies. The registration was
requested to start on 14 April 2011.
27.
The business activities were shown as “retail point of sale printed
materials.”
28.
The Director’s details were shown as Derek John Wallis.
29.
Mr Wallis stated he was also director of six other companies of which
one was Nowelle. He resigned as a director of Nowelle on 16 February 2011.
30.
The registration date for the appellant was 14 April 2011 with a VAT
registration number of 111 5842 25.
31.
The VAT application for registration put a figure of £600,000 as a turnover
estimate. Mr Moss thought this had been worked out using estimates of the
production capacity of the machinery and then adding a small profit.
32.
The appellant started business from when it acquired the machines in May
2011.
Customer base for this type of print business
33.
There was no particular loyalty among customers. The firm might be used
for some work but not others. It would depend on who the marketing team at the
retailer chose to use and the print company putting themselves up in front of
buying agents. It was the sort of business where you were only as good as your
last job.
Common ownership / control of seller and buyer
34.
Both Nowelle and the appellant had a common shareholder, Mr Derek
Wallis. Mr Wallis owned the appellant, and also had 70% of the ordinary shares
of Nowelle, the remaining 30% being held by Mr Stephen Woodley.
35.
Mr Wallis was a director of Nowelle up until his resignation on 16
February 2011.
36.
Mr Wallis was also involved in a number of other companies, one of which
was Harlequin. Harlequin was a customer of Nowelle and then became a customer
of the appellant.
37.
The business premises of Nowelle and subsequently the appellant were
owned by Harlequin Holdings Ltd.
Other equipment leased to HSBC
38.
On 6 May 2011 the appellant entered into an equipment leasing agreement
with HSBC for various pieces of equipment including cutting machines /
guillotines and printers. The cash price of the goods was £181,025.63. This
equipment was previously used by Nowelle who leased the assets through HSBC as
well.
Premises
39.
Nowelle operated from premises in Hatfield. It was a tenant of Harlequin
Holdings Ltd who was the freeholder. The premises were on the market for sale
with vacant possession. Nowelle had made plans to use premises in Welwyn Garden
City. The buyer for the Hatfield premises withdrew. The appellant decided to
use the Hatfield premises rather than incur the costs of relocating to Welwyn
Garden City and having to kit out and develop the new site. Mr Moss estimated
these costs to be in the region of £50-100,000.
40.
The appellant was invoiced for rent from Harlequin Holdings on 30 May
2011.
The sale of the machinery and equipment
41.
The invoice from Nowelle to the appellant dated 4 May 2011 was for
£78,000 with VAT included of £13,000. The appeal relates to HMRC’s decision to
reduce the appellant’s claim for input tax for the period 06/11 by £13,000 on
the basis that that there had been a transfer of a going concern between
Nowelle and the appellant.
42.
The invoice was headed “Sale of Machinery”. The assets specified were
various printers including a number of “hp Designjet 5500” printers, and a “Vutek
PV UV 320” printer. The invoice also referred to “other assets, office
equipment, computers, printers and racking as agreed which included “various
Apple Mac Computers, Accessories & Software.”
Employees
43.
A number of employees of Nowelle and subsequently the appellant had
specialist knowledge / skills in operating the printing machines. There were
also employees whose job it was to box and distribute the product and to carry
out administration.
44.
Nowelle had 21 employees as at 5 April 2011. All 21 of these employees
are shown as starting at the appellant on 9 May 2011. In addition Mr D Wallis
ended his employment with Nowelle on 31 March 2011 and started at the appellant
on 9 May 2011.
45.
Out of the 22 employees (the 21 employees plus Mr Wallis) 7 were shown
as starting on 9 May 2011 but also finishing on 9 May 2011. The records do not
show the date the employees left Nowelle but the longest the gap could be is 5
April 2011 to 9 May 2011.
46.
Out of the 22 employees who worked for Nowelle from end March/ early
April 2011, 15 of them became employees of the appellant.
47.
After 9 May 2011, 5 employees left the appellant. In 2011/12 the
appellant employed 4 additional employees to those who started on 9 May 2011.
The earliest new hire by the appellant following the tranche of employees who
started on 9 May 2011 was 1 August 2011.
48.
There was no formal agreement between the companies or between the staff
members of Nowelle and the appellant that they would be transferred to the
appellant.
The appellant’s business after the sale
49.
Bank accounts for the period May to July 2011 of the appellant show a small
amount of transactions in May 2011 and then significantly more in June and July
of 2011. Amounts of salary were paid to employees in June 2011. Several inflows
of large amounts came in from Harlequin – it is not clear to what extent this
was for work done or whether it represented transfer of funding. The appellant
was making purchases of supplies from at least as early as 8 June 2011.
Procedural history of this matter
50.
On 28 July 2011 the appellant submitted its first VAT return for the
period 06/11 (from 14 April 2011 to 30 June 2011).
51.
HMRC undertook a check of the return on the basis that it was a first
period repayment return of £25,752.67.
52.
Following the submission by the appellant of the requested information (the
10 largest VAT bearing invoices and bank statements), the information was
considered by Officer Shawn Dhaliwal.
53.
By letter dated 17 August 2011 Officer Dhaliwal set out his contentions
regarding certain transactions. Consequently in relation to the invoice number
GRI 4171 from Nowelle Ltd dated 4 May 2011 for £78,000 with VAT included of
£13,000, Officer Dhaliwal reduced the original claim by £13,000.
54.
By e-mail dated 6 September 2011 the appellant confirmed their business
address was Unit 6 the IO Centre, Hearle Way, Hatfield, Hertfordshire, AL10 9EW. They stated that at the time of registering for VAT they were relocating and had used
the business address of Harlequin as it was a company sharing common control
with the appellant.
55.
By letter dated 26 September 2011 HMRC advised the appellant of the
amounts by which the VAT return for period 06/11 would be amended. The revised
repayment to the Appellant was reduced from £25,752.67 to £12,752.67.
56.
By letter dated 12 January 2012, Officer Hanrahan of HMRC wrote to the
appellant upholding the decision that there had been a transfer of going
concern and agreeing the claim was to be reduced. Officer Hanrahan contended
that the conditions in VAT (Special Provisions) Order 1995 Article 5 had been
met in that the appellant had many of the same customers and traded from the
same premises. It was carrying on similar work, staff previously employed by
Nowelle were now employed by the appellant and the director was previously a
director of Nowelle.
57.
The appellant’s representative, Kingswood submitted an appeal to the
Tribunal dated 2 February 2012.
Appellant’s arguments
58.
The invoice was raised by Nowelle in good faith and without any
objective other than to properly transfer ownership of certain assets from one
entity to another and properly account for the VAT due on the sale of these
assets.
59.
The assets sold were a mixture of various types of equipment which in
themselves were not principally directly involved in the operation of a
printing company but form part of a series of assets that only if used with
other assets would allow an entity acquiring them to undertake the business of
printing. These assets did not constitute all the assets owned by Nowelle Ltd.
60.
There was no sale of the business of Nowelle Ltd to the appellant and
there was no sale and purchase agreement written or otherwise.
61.
There was no disposal of goodwill by Nowelle Ltd to the appellant.
62.
There was no parallel share structure or Board of Directors.
63.
Any common customers as between the appellant and Nowelle arose out of
the common control. Nowelle had other customers who did not transfer across to
the appellant.
64.
There was the transfer of employees but not all employees were
eventually retained.
65.
The fact that the appellant operated out of the same premises as Nowelle
Ltd arose for reasons totally unconnected with the sale of assets by Nowelle
Ltd to the appellant (profitability, cash flow, loss in terms of time,
inconvenience and relocation costs).
66.
HMRC were wrong to conclude the circumstances surrounding the demise of
Nowelle Ltd gave rise to a transfer of a business as a going concern. While
substance over form type arguments may be relevant where transactions have the
sole purpose of avoiding tax there was no intention to avoid tax here, on the
contrary subject to the liquidator of Nowelle Ltd submitting outstanding
information to HMRC, HMRC should fully recover all tax due by Nowelle.
67.
Nowelle Ltd properly accounted for the output tax of £13,000 on its
sales invoice and this is included in the total output tax of £29,401.60. The
unpaid VAT of Nowelle Ltd is £9,314.90 and in total £10,028.91 when the unpaid
VAT for the quarter ended 31 March 2011 is included. On any equitable approach
it is inappropriate for HMRC to disallow the full £13,000 and in the first
instance any reduction should be limited to £9,314.90 but more reasonably
taking account of all the unpaid VAT to £10,029.
68.
Once the liquidator of Nowelle Ltd has submitted corporation tax
computations to HMRC for year ended 31 December 2010 and the period ended 6 May
2011 HMRC will be able to offset the VAT apparently still due against the
repaid corporation tax under s130 Finance Act 2008. In their Notice 700/9 HMRC
say the main purpose of the TOGC rules is to:
“Protect Government revenue by removing a charge to
tax and entitlement to input tax where the output tax may not be paid to HMRC.
For example where a business charges tax which is claimed as input tax by the
new business but never declared or paid by the old business.”
69.
The input tax claim of £13,000 should be allowed to stand as otherwise
HMRC will have benefited from unjust enrichment.
70.
The Kenmir case is not relevant as it is an employment case dealing with
employment legislation.
71.
In relation to burden of proof it is HMRC’s responsibility to provide
evidence to support their case as it was their decision in the first place to
disallow the repayment claim by the appellant. HMRC have not provided any
factual evidence in support of their position. The appellant’s case is made more
difficult because it is difficult to produce evidence that something was not
there e.g. that there was no agreement.
Respondents’ arguments
72.
The term “going concern” has the meaning that at the point in time to
which the description applies the business is live or operating and has all
parts and function necessary to keep it in operation as distinct from it being
only an inert aggregation of assets.
73.
Businesses which are experiencing difficult trading problems can still
be a going concern and this applies to Nowelle.
74.
Case law establishes that the key approach is to look at the overall
effect of what has happened. Kenmir stresses the need to take all
factors into account. Individual factors are taken together as a whole, not
looked at independently.
75.
The following indicators support HMRC’s decision;
(1)
The business continued to be run from the same premises.
(2)
There were common customers in that Harlequin was the major customer,
(3)
There was a very close relationship between the two companies in that
Derek Wallis was a director of Nowelle Ltd although resigning on 16 February
2011 he remained as Company Secretary. As at the date of completing the VAT
Registration for the appellant (21 April 2011) he indicated he was director of
the company.
(4)
The vast majority of the staff employed by Nowelle during the year ended
5 April 2011 were shown to be employees of the appellant for the year ended 5
April 2012 which was the year the appellant commenced trading.
(5)
Equipment previously used by Nowelle was subsequently leased to the
appellant through HSBC thus enabling the appellant to continue in the same type
of business as Nowelle.
76.
The supply of the machinery put the appellant in possession of an
identifiable business; it had the equipment to carry on the business. The
appellant intended to use the assets for carrying on the same kind of business.
The effect of the transfer being to put the appellant in possession of a
business which could be operated as such.
77.
It is not necessary for jobs or contracts to be transferred or for there
to be a contract of sale, or purchase of goodwill in order for there to be a
transfer of a going concern.
78.
While there may not have been the intention to trade from the same premises
the appellant did and still does trade from the same premises as previously
used by Nowelle Ltd.
79.
The output tax due from Nowelle has not been paid and therefore the concessionary
treatment that HMRC might have otherwise been able to give did not apply. HMRC
could consider this concession if the output tax was subsequently paid but as
at the date of the hearing was not in position to do so.
80.
The burden of proof lies with the appellant to show there had been a
supply between Nowelle and the appellant and that the supply was not part of
a transfer of a business as a going concern.
Discussion
Issue for determination under Article 5 of the VAT
(Special Provisions) Order 1995 (“the 1995 Order”)
81.
On the basis of the parties’ submissions and the evidence before us much
of the requirements of the 1995 Order are not in issue.
82.
The supply of machinery and equipment by Nowelle to the appellant on 4
May 2011 was a supply of assets of Nowelle’s business within the meaning of the
relevant provision. The assets were assets which were to be to be used by the
appellant “in carrying on the same kind of business…as that carried on by the
transferor” or the same kind of business as that carried on by the transferor
in relation to the part transferred. Nowelle and the appellant were both
engaged in printing for retailers. Mr Moss mentioned it was the intention of
the appellant to have smaller print runs in order to reduce labour costs but
this is a matter of scale and does not affect our view that the appellant was
engaged in the same kind of business as Nowelle. This was a case where the
transferor, Nowelle, was a taxable person, and that being so, the appellant, as
the transferee, satisfied the condition that it was already a taxable person
having become registered from 14 April 2011.
83.
The key issue for our consideration was whether under article 5(1)(a) of
the 1995 Order the supply of assets to the appellant was a supply “to a person
to whom [Nowelle] transfers [its] business as a going concern”.
84.
If the whole of Nowelle’s business was not transferred, then article
5(1)(b) also needs to be considered i.e. whether the supply of assets to the
appellant was supply “to a person to whom [Nowelle] transfers part of [its]
business as a going concern”. For article 5(1)(b) to apply the part of the
business transferred needs to be capable of separate operation.
85.
The legislation does not provide a definition of what is meant by
“transfers his business as a going concern”. HMRC refer the High Court decision
in Kenmir which set out the matters to be considered in answering the question
of what amounted to a transfer of business as follows:
“(page 335) In deciding whether a transaction
amounted to the transfer of a business regard must be had to its substance
rather than its form….In the end the vital consideration is whether the effect
of the transaction was to put the
transferee in possession of a going concern the activities of which he could
carry on without interruption…the absence of [an assignment of goodwill] is not
conclusive if the transferee has effectively deprived himself of the power to
compete. The absence of an assignment of the premises, stock-in-trade or outstanding contracts will likewise not be
conclusive, if the particular circumstances of the transferee nevertheless
enable him to carry on substantially the same business as before.”
86.
Mr Moss argued this was not of relevance because it related to
particular employment legislation.
Is Kenmir restricted to the context of employment law?
87.
Kenmir was indeed an employment law case. The particular
statutory provisions in issue were s1 and para 1 Schedule 1 of the Redundancy
Payments Act 1965 and Schedule 1 of the Contracts of Employment 1963, paragraph
10(2) of which provided:
“If a trade or business or an undertaking…is
transferred from one person to another, the period of employment of an employee
in the trade or business or undertaking at the time of the transfer shall count
as a period of employment with the transferee and the transfer shall not break
the continuity of the employment”
88.
Looking at the judgment of Widgery J in the case it can certainly be
seen that in relation to his consideration of the significance of there being a
lack of transfer of goodwill his reasoning is developed by reference to the aim
of the particular employment legislation at issue:
“Schedule 1 to the Act of 1963 is concerned with
continuity of employment and uses the phrase “transfer of business” to describe
a situation which a change of employer should not be regarded as a break in the
continuity of employees’ engagements. If a business has no goodwill because it
is at a low ebb, or because it sells all its production to an associated
company, the factory premises might be sold and all the activities of
production transferred to the new owner without interruption; yet if counsel’s
argument is right, the employees’ accrued rights under the Acts of 1963 and
1965 would be lost unless the transfer included a formal empty phrase
purporting to include goodwill.”
89.
But, the propositions set out in the excerpt at [85] above that regard
must be had to substance rather than form, and whether the effect of the
transaction was to put the transferee in possession of a going concern, the
non-conclusive nature of the factors mentioned, and the question of whether the
activities of the going concern could be carried on without interruption can,
and has, been applied more widely.
90.
There are a number of decisions of the VAT Tribunal and of this
Tribunal ( of which Mark Young t/a The St Helens [2012] UKFTT 702 (TC)
and Brenda Massey t/a The Basement Restaurant [2012] UKFTT 102 (TC) are
relatively recent examples) which apply the propositions set out in Kenmir to
the context of VAT. The relevant propositions in Kenmir were also
endorsed at High Court level in the case of Customs and Excise Commissioners
v Dearwood Ltd. [1986] STC 327 which considered whether there had been a
transfer of business as a going concern in the context of Regulation 12(1) of
the Value Added Tax (Special Provisions) Order 1981 which in so far as relevant
to the issue here contained identical wording to the 1995 Order. It is not
correct therefore to see the propositions set out in Kenmir as only
confined to the context of employment law.
Lack of Sale and Purchase Agreement
91.
In any case even if Kenmir does not carry the relevance that HMRC
suggest this does not assist Mr Moss’s arguments. The legislation raises the
question of whether the appellant is a person to whom Nowelle transfers its
business as a going concern. There is no statutory requirement that there be a
formal agreement transferring the business. The absence of a Sale and Purchase
Agreement does not mean the business cannot have been transferred. Even if Kenmir
were not applied it is difficult to see what other approach could be taken
to seeing whether there was a transfer of business other than looking at the
circumstances of the transaction. In relation to burden of proof Mr Moss
argued that as it was HMRC’s decision to disallow the repayment claim it was
for them to provide evidence to support their case. We do not think that is
correct. It is for the appellant to demonstrate that the appellant was not a
person to whom Nowelle transferred its business. Mr Moss referred to the
difficult position the appellant faced in having to prove a negative namely in
showing that an agreement to transfer the business did not exist. The appellant
does not face such an uphill struggle. It just has to bring evidence on the
circumstances of the transaction, and the activities of Nowelle and the
appellant at the relevant time to show that it was more likely than not that
Nowelle did not transfer its business to the appellant. We have in any event
accepted that a formal Sale and Purchase Agreement did not exist but as
mentioned above this is not determinative.
92.
Mr Moss’s argument that “substance over form” arguments are only
relevant where there is tax avoidance does not take the matter further. In
looking at the circumstances of the transactions between Nowelle and the
appellant there is no form that has been overridden or disregarded. To the
extent it is the lack of form in the shape of a formal sale and purchase
agreement that the appellant complains has been disregarded then as stated
above such formality is not a requirement of the legislation.
93.
We have no reason to doubt that the transaction was not for tax
avoidance but this is irrelevant to the question of whether the effect of the
transaction was such that the appellant was a person to whom Nowelle
transferred its business or part of its business. Similarly when Mr Moss says the
invoice for the machinery was raised in good faith and without any objective
other than to transfer ownership of the assets from Nowelle to the appellant we
have no reason to doubt this is the case but this also does not help us on the
issue of whether there was a transfer of business as a going concern.
94.
The absence of a comprehensive agreement dealing with sale and purchase
and an agreement is perhaps not altogether surprising given the degree of
inter-relatedness between Nowelle and the appellant flowing from Mr Derek
Wallis’ ownership interest and involvement in both the companies. Further the
nature of Nowelle’s business was that it consisted of short term contracts for
specific pieces of work. There would therefore have not been a need for a
formal transfer of ongoing contracts to the appellant.
95.
We turn now to the various other circumstances argued by the parties as
pointing to a particular conclusion on whether there was a transfer of a
business as a going concern.
Whether assets sold could without more be used for a printing business
96.
Mr Moss argues the assets sold were not principally used in the printing
business and more would be needed for an acquirer to undertake a printing
business. As discussed above, the issue is whether the appellant was a person
to whom Nowelle transferred its business or part of its business. It does not
need to be established that the assets transferred were the business. In any
event although there was a residual category of “other assets office
equipment…racking, accessories and software” on the invoice the hp Designjet
printers and the Vutke PV UV 320 printers were items that an acquirer would use
to undertake printing. Further, within a matter of days from the transfer, the
appellant also took over the lease on a significant value of other equipment
including, cutting machines, guillotines and printers. On the evidence the
appellant was trading from May / June but there was no evidence provided to us
other machinery or equipment the appellant needed to start trading and no
evidence in the bank statements of the appellant provided that suggested that
further machinery needed to be bought.
97.
Mr Moss also argued that the assets sold did not constitute all the
assets owned by Nowelle however there was no evidence put before us to
substantiate this. Even if Nowelle had retained assets this would not necessarily
address the possibility of there having been a transfer of part of a business.
Significance of common ownership / control
98.
HMRC refer to the close relationship in terms of ownership and control
as between Nowelle and the appellant as being an indicator which supports their
decision that there was a transfer of business. In his written submissions Mr
Moss argued there was no parallel share structure or Board of Directors. While
there is not an exact correspondence of ownership and directorships as between
the two companies Mr Wallis has played a significant part in both. As mentioned
above the inter-relatedness may be relevant to explaining why there was no
formal agreement, but we are not persuaded that in and of itself it tends to
suggest that the transaction between Nowelle and the appellant was a transfer
of business. It is quite possible that related companies enter into a
transaction which is simply an asset sale. Whether that is part of a transfer
of business will depend on other factors.
Customers in common
99.
Another indicator which forms the basis of HMRC’s decision is that
Nowelle and the appellant had a common major customer in the form of Harlequin.
In written submissions the appellant argues that Nowelle had a number of
customers but that the appellant did not have any of these customers other than
Harlequin. Harlequin became a customer because of the common control connection
but it did not have an agreement with Nowelle or with the appellant and was
free to go to the market to source the best quotes for any particular job.
100. Mr Moss’s
evidence that Nowelle had a number of customers was consistent with the fact a
number of different retailers were shown on the schedule of output tax for
Nowelle in April 2011. However to the extent there was no evidence that these
customers had moved across to the appellant we do not think that can be taken
as pointer toward to there not being a transfer of business because we accept
that the business consisted of carrying out particular bespoke print jobs and
repeat business could not be assumed. In respect of Harlequin becoming a
customer of the appellant even if the reason for that was because of the common
control element it remains the case that business that Nowelle was doing for
Harlequin was subsequently carried out by the appellant. Harlequin may well
have been free to source the best quotes but there was no evidence before us
that it became a customer of the appellant only after having gone through such
a process. That a repeat customer of Nowelle also became a customer of the
appellant is a factor which in our view points towards there having been a
transfer of business.
Operating from same premises
101. Nowelle did jobs
for major and high-end retailers including M&S, Selfridges, Ralph Lauren
and Hackett. The appellant’s business strategy was to do printing for retailers
but in smaller and less labour intensive print runs. From what Mr Moss told us
we accepted that the main way in which business was acquired was through pitching
for business for specific jobs from the marketing teams of these retailers.
Taking this into account the location of the particular premises in Hatfield would
not we think be a factor of any significance in attracting or retaining trade.
While the factor of whether the premises of the transferor and transferee were
the same was relevant to consider it is not one which we give any significant
weight given the kind of business Nowelle and the appellant were engaged in.
102. But, to the
extent there is any relevance attached to the appellant operating out the same
premises we disagree that this is undermined by the appellant having had an
intention to move to other premises. In examining whether there was a transfer
of business or not we think the fact of where the appellant actually ended up
operating from is relevant to understanding whether the business could be
carried on after the transfer without interruption.
Employees
103. HMRC point to
the fact that a significant number of employees who were employed by Nowelle in
2011 subsequently became employees of the appellant. Mr Moss said there was no
agreement that staff would be transferred and not all the employees were
eventually retained. He also argued that the reasons for the common employees
arose from their specialist skills to use the printers and also due to Mr
Wallis’s concern that the livelihoods and welfare of employees that he knew
were at stake.
104. We think the
level of identity between Nowelle’s workforce and that of the appellant is a
strong indicator towards there having been a transfer of business irrespective
of whether there had been any formal agreement to transfer them. Again the
commonality of ownership and control between the transferor and transferee may
go some way to explain any lack of formality. In addition to printers,
computers and other specialist office equipment the business of Nowelle
required skilled operators to use the machines, persons to box and distribute
the materials and administrators. As of 9 May 2011 the appellant was in a
position to use the labour Nowelle had used. This was not restricted to skilled
machine operators but also to persons who were familiar with the administration
of Nowelle’s business. The appellant did not make any new hires of staff until
some months later. The fact that some of these employees left later on is
something that could have happened whether there was a transfer of business of
not so does not help with the issue before us.
105. Similarly, in
relation to the argument as to Mr Wallis’s reasons for hiring staff from
Nowelle, we did not have evidence before us on which to make a finding on the
point, but even if we had, the fact there may have been an underlying
altruistic motive to hiring staff who had previously worked at Nowelle would
not mean that looking at the transaction in the round there could not have been
a transaction which amounted to a transfer of business.
106. In his
cross-examination of Mr Dhaliwal Mr Moss drew attention to the fact that information
about the employees of Nowelle and the appellant had not been considered by
HMRC when Mr Dhaliwal made his decision on behalf of HMRC on 26 September 2011
and further that it did not appear that HMRC had made any internal record of
its reasons for reaching the conclusion it did. In relation to the first point
it should be noted that it is open to the Tribunal to examine all the relevant
evidence put before us on the issue. This is not the sort of appeal (in
contrast to other appeal settings where the Tribunal is directed by specific statutory
provisions) where the Tribunal must restrict itself to considering information
that was available to HMRC at the time the decision was made. The second point on
HMRC’s conduct in recording its decision making does not have a bearing on the
question of whether the transaction between Nowelle and the appellant was a
transfer of a business as a going concern.
Absence of disposal of goodwill
107. Mr Moss argues
it is significant that there was no disposal of Nowelle’s goodwill. As pointed
out in Kenmir the absence of an assignment of goodwill is not necessarily
conclusive if the transferee had effectively deprived himself of the power to
compete. We heard from Mr Moss that there was little in the way of brand
loyalty or repeat business from Nowelle’s customers. Nowelle would have to put
itself in the frame for specific jobs through pitching to the marketing teams
at the retailers. To the extent there was ongoing business coming in from Harlequin,
that was a company which was part of the same group of companies in which Mr
Wallis was involved and Harlequin was in our view unlikely to start using an
unrelated company for its requirements. In terms of ability to compete, in May
2011 Nowelle was in financial difficulty, it had sold machinery and equipment
to the appellant and also transferred across leased equipment. There was no
evidence that other machinery or skilled labour to operate the machines
remained with Nowelle such that it was in position to compete. The absence of
an assignment of goodwill in these circumstances is not conclusive of there not
being a transfer of business as a going concern.
Duration between Nowelle stopping business and appellant starting its
business
108. According to Kenmir
a vital consideration in deciding whether a transaction amounts to a
transfer of business is “whether the effect of the transaction was to put the
transferee in possession of a going concern the activities of which he could
carry on without interruption…” In considering whether the appellant could
carry on the business without interruption it is relevant for us to consider
the duration of any interruption in business. We note that Nowelle had been
invoicing for work done up until April 2011 and that on the evidence before us
the appellant had started to conduct business in May 2011. Whatever
interruption there was between the business of Nowelle stopping and the
business of the appellant starting was minimal by any account and certainly
insignificant in the context of a printing business creating bespoke materials
for retailers.
Conclusion on whether there was a transfer of business
as a going concern
109. On 4 May 2011, the
appellant had printers and office equipment transferred to it worth £65,000 and
a lease for other equipment in the order of £181,000 transferred to it on Friday
6 May 2011. Out of 22 of Nowelle’s employees 15, started with the appellant on Monday
9 May 2011. In the course of May 2011 the appellant was open for business in
the same kind of business that Nowelle was conducting. As of that month the
appellant had the machines and equipment to enable it carry out printing for clients
who were retailers, it had employees who knew how to operate the machines and
employees familiar with boxing, distribution and administration of printing for
such clients and it had premises from which to operate from. A repeat customer
of Nowelle came across to the appellant. The demise of Nowelle starting in
April 2011 and the incorporation and starting up of the appellant at the same
time was not a co-incidence but part of a business strategy to steer the printing
business into a less labour intensive and more benign business environment.
110. In our view the
combination of these circumstances points towards there being a transaction
between Nowelle and the appellant which amounted to a transfer of Nowelle’s business
as a going concern. Without labour, machinery and equipment or premises, Nowelle
was not able to and did not continue with other business after the transaction.
The effect of the transaction was that there was a transfer of all of its
business so the issue of whether there was a transfer of part of the business
and the issue of whether the part was capable of separate operation does not
arise. The appellant was therefore a person to whom Nowelle had transferred its
business as a going concern for the purposes of the 1995 Order.
111. Accordingly the
supply of machinery and equipment from Nowelle to the appellant on 4 May 2011
is not to be treated as a supply of goods or services.
Payment of output tax, unjust enrichment and HMRC concession
112. Mr Moss argued
Nowelle had properly accounted for the output tax of £13,000 on its sale and
that if the appellant’s input tax claim was denied this would amount to HMRC
being unjustly enriched. Even if that were not accepted the unpaid VAT of
Nowelle was £9,314.90 (or £10,028.91 if other unpaid VAT for the quarter ended
31 March 2011 is included) so it would be inequitable if HMRC did not limit
their disallowance of £13,000 to take account of these figures. Mr Moss argued
further that once the liquidator has submitted corporation tax computations to
HMRC for the year ended 31 December 2010 and the period ended 6 May 2011 HMRC
will be able to offset VAT due against the repaid corporation tax under s130
Finance Act 2008. He points to Notice 700/9 and the stated aim of the transfer
as a going concern rules being “to Protect Government revenue by removing a
charge to tax and entitlement to input tax where the output tax may not be paid
to HMRC”.
113. HMRC disagreed
that the output tax of £13,000 had been paid. They said the corporation tax
position was not settled, and the position on any set off against corporation
tax was moot.
114. On the basis of
the evidence before us we were not able to make a finding that the output tax
of Nowelle had been paid as at the date of the hearing. Nor were we able to
determine the impact if any that the set off provisions in s130 Finance Act
2008 had or would have on the VAT due from Nowelle.
115. In any case we
do no think either of these points if established would help the appellant.
Applying the relevant statutory provisions of the 1995 Order to our findings of
fact, the conclusion is that the supply of machinery is not to be treated as a
supply of goods or services. There is no basis in those provisions or any other
statutory provisions which would allow the Tribunal to find that the appellant
could, despite there being no supply, claim entitlement to all or some of the
input tax on the basis that otherwise HMRC would be unjustly enriched. The fact
that one of the purposes of the provisions set out by HMRC in its Notice 700/9
refers to a situation where the output tax has not been paid (the other purpose
expressed as being to relieve the buyer of a business from the burden of
funding any VAT on the purchase) does not enable the Tribunal to read in
further conditions to the 1995 Order which are not set out there.
116. HMRC mentioned
that where they are satisfied that the amount thought to be input tax as shown
on an invoice has been declared and paid to HMRC by the seller the purchaser
may be allowed to recover the amount as though it were VAT by way of concession.
The applicability and operation of any such concession available to HMRC is not
however something this Tribunal has jurisdiction to deal with.
Conclusion
117. There is nothing
in any of the appellant’s arguments as to unjust enrichment, inequity, or the
operation of a concession by HMRC which causes us to depart from the conclusion
that the supply of machinery and equipment on 4 May 2011 is, pursuant to the 1995
Order, not to be treated as a supply of goods or services. The appellant’s
appeal against HMRC’s decision to disallow input tax on the invoice for the
machinery and equipment fails and the appeal is dismissed.
118. This document
contains full findings of fact and reasons for the decision. Any party
dissatisfied with this decision has a right to apply for permission to appeal
against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal)
(Tax Chamber) Rules 2009. The application must be received by this Tribunal
not later than 56 days after this decision is sent to that party. The parties
are referred to “Guidance to accompany a Decision from the First-tier Tribunal
(Tax Chamber)” which accompanies and forms part of this decision notice.
SWAMI
RAGHAVAN
TRIBUNAL JUDGE
RELEASE DATE: 11 April 2013
