INPUT TAX – Transfer of business as going concern – Sale of entire stock of company to another company also containing the name EC Reese – Sales comprised in 65 invoices – Purchaser company carrying on same business in same premises – Both companies controlled by same person – Short period after transfer when new company not trading – Intent not to transfer going concern – Whether there was transfer of going concern – VATA 1994 s 5(3) – VAT (Special Provisions) Order 1995, art 5(a)

LONDON TRIBUNAL CENTRE

	E C REESE AGRICULTURAL LTD	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	ANGUS NICOL   (Chairman)
						GEORGE MILES

Sitting in public in Cardiff on 13February 2003

Ernest Reese, director, for the Appellant

Raymond Hill, counsel, instructed by the Solicitor for the Customs and Excise, for the Respondents

© CROWN COPYRIGHT 2003

DECISION

1.	The Appellant, which carries on business in the sale and maintenance of farm machinery and spare parts, is appealing against an assessment to VAT in the sum of £8,661 (plus interest).  The assessment is in respect of input tax claimed by the Appellant on supplies made to a related company, E C Reese & Sons Ltd (“Reese & Sons”) which was disallowed by the Commissioners on the basis that the supplies in question were made in the course of a transfer of a going concern by Reese & Sons to the Appellant, and were therefore, in accordance with article 5(1)(a) of the Value Added Tax (Special Provisions) Order 1995 (SI 1995/1268), not supplies for VAT purposes.

The facts

2.	Mr Ernest Reese, the managing director of both Reese & Sons and the Appellant, represented the Appellant and gave evidence.  He told us that Reese & Sons had been started by him in 1964.  In 1982 it took on the sale of Massey-Fergusson machinery.  In 1997 it found itself in financial difficulties, having a large overdraft and a considerable quantity of stock, which was not being sold.  Reese & Sons was sued by Massey-Fergusson, and in December 1997 there was an auction of the company’s assets.  That was followed by the BSE disaster, which resulted in poor sales.  Reese & Sons had an overdraft of about £60,000 and between £150,000 and £200,000 worth of stock.  As Mr Reese saw it, in about November 1998, the only way out of the difficulty was to sell to another company.  However, he could not find another company to which to sell, and therefore decided to set up another company and sell the assets to it.  The new company was the Appellant, which was going to trade in cattle feed, fertilizers, and fencing materials, there being no other company in that side of the business in the area, near St Clears, Carmarthenshire.  Then Barclays Bank served a statutory demand for about £58,000 on Reese & Sons.  The new company, the Appellant, had to buy all the assets of Reese & Sons; no-one else was interested in buying any of it.  The stock was down-valued at the end of 1998.  There were no tax allowances, but all possible depreciation was taken off.  Much of the stock was surplus, nearly all the current market stock having been sold.  

3.	Mr Reese said that he negotiated with the National Westminster Bank to buy the stock, since the court had ordered Reese & Sons not to trade in Massey-Fergusson products.  The new company would, therefore, have to have an entirely separate identity.  The National Westminster agreed to finance the purchase, and the Appellant was incorporated as an entirely separate company.  If the sale were the transfer of a going concern, Mr Reese said, the Appellant would be subject to the High Court order made on behalf of Massey-Fergusson.  The Appellant was registered for VAT.  Mr Reese said that he was advised that there was a choice, either the transfer of a going concern, or a simple sale of stock to the Appellant.  Reese & Sons sold the remaining stock to the Appellant.  Mr Reese produced 65 invoices relating to the sales of stock, and a statement of account.  The Appellant claimed the input tax on the sales, together with its other input tax entitlement, and carried on trading.  A winding-up order was served on Reese & Sons for the amount of VAT on the £58,000 in January 2000.  But the Appellant still exists.  It was hit badly by the foot-and-mouth epidemic, and it is trading badly.

4.	On the transfer of the stock, Mr Reese said, the Appellant paid VAT to Reese & Sons, but Reese & Sons did not pay it on to the Commissioners.  At the end of 1998 Reese & Sons sent in a return with a note explaining that there was no money left and that it was ceasing to trade, and that the National Westminster Bank was financing the purchase of its assets.  The Appellant is, Mr Reese said, still trading.  But in a letter to the Tribunal dated 27 September 2001 the Appellant said, “Whatever the outcome of the appeal, the VAT will not receive any monies, and it will lead to the winding up of the company, as there are unsufficient assets to cover the claim.”

5.	Asked about the applications for registration in respect of both the Appellant and Reese & Sons, Mr Reese agreed that both the forms gave as the main business of each company dealing in agricultural machinery.  When the form VAT 1 for the Appellant was filled in, which was done in a hurry, Mr Reese said, it was not the intention to deal in agricultural machinery.  But the Appellant was forced to buy the stock of Reese & Sons, and therefore had to sell it.  It should have been readily saleable, as it was devalued, but (and Mr Reese expressed himself quite forcibly) if you have to sell you get very little for it.  A year and a half had passed between the end of the Massey-Fergusson franchise and the sale of stock to the Appellant, and by that time Reese & Sons had no franchise which it could sell.  Until the sale, on 31 December 1998, Reese & Sons could trade.  But Mr Reese said that his fitter was off with blood poisoning from mid-December until mid-February 1999.  Otherwise there was nothing to prevent Reese & Sons trading, except that no-one wanted to buy anything, right up to the date of the sale.  All the employees of the company, including directors, were made redundant at the end of December, until February 1999, when they were re-employed by the Appellant.

6.	Both Reese & Sons and the Appellant traded from the same premises.  Their customers were local farmers, and the Appellant’s customers are the same people as those of Reese & Sons had been, though some went to the new Massey-Fergusson franchisees.  The Appellant took over the telephone number of Reese & Sons.  Mr Reese’s name was kept in the name of the company, he said, because it was an appropriate name, not specially because it was known.  Also, the Appellant continued using Reese & Sons writing paper.  There was no express agreement that the Appellant would take over the trade of Reese & Sons; the latter had no trade to take over.  As for goodwill, Mr Reese pointed out that a bankrupt company had no goodwill to pass on.  

7.	The 65 invoices covered all the stock that Reese & Sons had.  It also sold to the Appellant some tools necessary for tractor maintenance.  There was some equipment which was personally owned by Mr Reese.  There was also some equipment which had been bought between 1982 and 1998, which was used for maintenance of Massey-Fergusson tractors.  That was also sold to the Appellant, and that, Mr Reese conceded, was a transfer of a going concern.  The Appellant has since done some repair work.  Some of the invoices were for single items, usually large items of machinery, and most of them were for 20 or 30 items and extended over more than one page.  The statement of account, which was computer generated, and listed all the invoices, was addressed to the Appellant, and was in the total sum of £58,172.16 including VAT.

8.	Mr Reese was referred to the visit report of Mr Gillam, who made a visit on 22 September 1999.  That report included the following passage:

“Mr Reese refuted any suggestion that the transactions [referred to] above represented a TOGC.  He said:
1.	It was a sale of individual stock items, which were all invoiced separately, although said to have been paid for with 1 cheque VAT included.
2.	There was no sale of goodwill. 
3.	There was a 2 week break in trading between the old and new companies.  However during discussions it became apparent that the arrangements were contrived to avoid being a TOGC and enable VAT to be charged by the old company and recovered by the new.  Mr Reese made comments like:
	‘The accountant made sure there was a 2-week break.’
‘The VAT regulations do not say how long the break should be to avoid being a transfer.’
‘If we had included all the stock in 1 invoice that could have been a transfer, but we invoiced individual stock items.  The sale of an asset or item of stock is not a transfer.’
He reiterated a number of times that stocks and assets were sold and the sale did not constitute a transfer.”

Mr Reese agreed that those quotations contained the gist of what he had said.  He said that the stock had been sold under 65 invoices and to another company so that it should not be a transfer of a going concern, and that that was why there had been a two-month, not two-week, break.  The visit report said, a little later, 

“The fact that Mr Reese had chosen not to trade for 2 weeks after the stocks had been transferred made no material difference to the nature of the transactions.  Nor did the issue of multiple invoices rather than 1 make any difference.  In such situations there has to be a record of the items involved.  This could be grouped to 1 invoice or shown on several.
No sales invoices were issued before 30/1/99.  This was said to be because the computer had not been fed details of the new company.  Records were kept on ‘bits of paper on the counter’.
Sales invoices for the new company have the same format as the old.  Purchases were made by the new company during the first two weeks of 1999.”

Mr Reese said that Mr Gillam assumed that trading was going on in January and early February 1999.  The computer had in fact been sent away to be reprogrammed for the new company.  The new company was not trading, and he was not working because there was nothing to do at that time.  The turnover for the end of February was very low: £2,282 for two weeks, as compared with £6,000 for a normal full month.  There were produced the historic return details for Reese & Sons and the Appellant, which shewed declared output tax for 3/97 of £12,382 decreasing to £5,922 for 9/98.  The output tax for 12/98 was £14,694, followed by a nil return for 3/99.  The first return for the Appellant was for 2/99, and output tax of £2,282 was declared, followed by £6,028 for 5/99 and £6,458 for 8/99.

9.	A note by Mr Gillam of a telephone conversation between Mr Reese and Mr Gillam records:

“...he says that the new company is not engaged in the same activity as the old.  In addition to the engineering aspect, it now sells ‘quad bikes’, feedstuff and fertilizer which the old company did not.  However all the records seen for the 1st 2 VAT periods indicated that the same trade had continued apart from the 2 week break.  Quad bikes are used by farmers in the same way as small tractors, thus are just another item of agricultural machinery.”

10.	Mr Gillam also gave evidence.  He said that he had visited the Appellant on 22 September 1999 following a repayment claim.  A surveyor, Mr Brian Halliday, was with him.  He had also called in at the Appellant’s accountants, Llewellyn Davies, on the way.  He said that the impression that he had obtained was that there had been no cut-off date for Reese & Sons in September 1998, and then there was a deliberate cut-off at Christmas.  Then trading started again after two weeks.  That two-week break was discussed, and Mr Reese had said that he was not sure whether two weeks was enough.  Mr Reese put it to Mr Gillam in cross-examination that two weeks was never mentioned, because the break was two months. Mr Gillam said that he was prepared to be categoric, and repeated that the break was discussed as being two weeks.  Mr Reese had said that the accountant was going to make sure that it was at least two weeks, and that the VAT regulations did not say how long the break should be.

11.	Mr Gillam said that the first invoice of the Appellant that he saw was dated 30 January. There had been no computer before that date, because it was being reprogrammed.  That date, 30 January 1999 was the end of the first month’s trading.  The new invoices were in the same format and layout as the old ones; it was a standard invoice layout, and there was nothing special about it.  Mr Gillam said that as a result of the visit he came to the conclusion that Reese & Sons had transferred sufficient assets to the Appellant to enable the Appellant to carry on the business of agricultural engineers.  There had been a break in trading for two weeks.  There were 65 invoices, but that made no difference.  The price was paid in one cheque.  The purpose of the sale of the assets was to enable the business of Reese & Sons to be carried on by the Appellant.  The two-week break would have happened anyway, since it was over Christmas.  There were invoices issued on 30 January 1999 for work done before that date.  There were also purchase invoices dated in early January: clearly the Appellant had orders for work, or the parts would not have been ordered.  As to the bits of paper, he could not now remember whether they related to January 1999, nor what was written on them.

12.	Mr Halliday told the Tribunal that he had accompanied Mr Gillam on the visit, and had written a report afterwards.  His report was produced: it was a computer print-out, and was dated 1 June 1999.  Mr Halliday said, however, that he was sure that he had written the report on 22 or 23 September.  For some reason, the date on the report has been amended by hand to 24/4/99.  Mr Halliday said that he would have read Mr Gillam’s report and signed it if he had agreed with it.  Mr Gillam’s report does, indeed, bear Mr Halliday’s signature.  In the report Mr Halliday said that he concurred with the conclusion to which Mr Gillam had come.  He said that there was some stationery in use in January under the name of Reese & Sons, though, the visit being in September 1999, he could not remember what had made him think that the stationery was in use in January.  He had a note that Reese & Sons had ceased trading a fortnight before the Appellant started.

The law

13.	By section 5(3) of the Value Added Tax Act 1994,

“(3)	The Treasury may by order provide with respect to any description of transaction—

	. . .
(c)	that it is to be treated as neither a supply of goods nor a supply of services.”

The Order made under section 5(3) is the Value Added Tax (Special provisions) Order 1995, which, so far as is relevant to this appeal, provides as follows:

“5.	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)	. . .”

Paragraph (2) refers to the situation where a person transfers only a part of his business to another as a going concern.  It is not suggested that that is the case in the present appeal.

The Appellant’s contentions

14.	Mr Reese’s own contentions were based upon the facts of the case, rather than the law.  However, at an earlier stage of the appeal the Appellant had been represented by PriceWaterhouseCoopers (”PWC”), between whom, as well as Llewellyn Davies, and the Commissioners correspondence had passed which had included submissions by PWC on the law.  We therefore considered them as being the Appellant’s contentions on the law.  The correspondence began with a letter dated 21 October 1999 from Llewellyn Davies, stating their understanding that “the transfer of a business as a going concern provisions are not mandatory”, and that the VAT charged by Reese & Sons on the sale of the assets was appropriate, and the assessment should be revised.  The Commissioners replied with article 5(3) of the 1995 Order, concluding:

“However, there is a working practice whereby input tax claimed on a TOGC is allowed to stand when it can be demonstrated that the corresponding output tax has been fully accounted for.  In this case the output tax has been included on a VAT return but not accounted for.  The credit claimed by E C Reese Agricultural Ltd is not input tax and not therefore deductible.”

Llewellyn Davies replied on 2 November 1999, agreeing that VAT should not have been charged by Reese & Sons, and suggesting that it should therefore be recovered from that company.  Further letters were exchanged in which Llewellyn Davies continued to maintain that there had been no transfer of the business as a going concern, and the Commissioners continued to uphold the assessment.  The Appellant’s notice of appeal is dated 29 June 2000, and the Commissioners’ statement of case was dated 13 September 2000.  That was followed by a letter from Rebecca Taylor of the Office of the Solicitor for the Customs and Excise, setting out the Commissioners’ case in greater detail “with a view to persuading your client to reconsider his own position”.  That letter repeats some of the contentions already made by the Commissioners, and refers to a number of Tribunal decisions and also the decision of Widgery J in Kenmir Ltd v Frizzel [1968] 1 All E R 414.  The letter continued:

“The following are factors which the Commissioners are advised to take into account when determining whether a transfer is a TOGC and they are factors which the courts will have considerable regard to:

-   similarity of business name, as also knowledge of customers and common directors
-   consensus between vendor and purchaser
-   common employees
-   common premises
-   transfer of all assets, especially plant and equipment and stock

The general principle underlying all of the authorities referred to is that in deciding whether a transaction amounted to a transfer of a business regard must be had to its substance rather than its form (see in particular Kenmir Ltd v Frizzel).  It is the Commissioners’ view that, on this approach, the inevitable conclusion is that the transfer was indeed a TOGC.  We understand that Mr Reese was aware of the possibility and thought he had guarded against it.  This was in itself proper and we make no suggestion of dishonesty, but we do maintain that that understanding was utterly mistaken.”

15.	It was at that time that PWC were instructed by the Appellant, and they replied to Miss Taylor’s letter at considerable length, setting out the background to the appeal and reviewing the facts, legislation, and case law, with a request that the decision be further reviewed.  Having set out the facts and article 5(3) of the 1995 Order, PWC dealt with the case law, in the following terms.

“There is no definition of what constitutes a transfer of a going concern in VAT legislation.  The provisions merely state that in circumstances where a business has been transferred as a going concern then the supplies of assets from the vendor are treated as neither a supply of goods nor a supply of services.  A wealth of case law has therefore developed relating to the definition and criteria that can be used in determining whether or not a transaction or series of transactions represent a TOGC.

Case law in this area, in our opinion seems to indicate that the supplies from Sons to Agricultural cannot be deemed as being a transfer of a business as a going concern.  The cases which are most relevant to the supplies made by Sons to Agricultural are outlined below.

The general principles in Kenmir Ltd v Frizzell [1968] 1 WLR 329 QBD are a logical place to start when attempting to establish whether or not the supplies of assets and stock by Sons to Agricultural qualify as a TOGC.

The Kenmir principles suggest that when determining if transactions qualify as a TOGC the following points should be considered.  Was there a sale or transfer of goodwill, the vendor’s business name, customer lists, stock, plant and equipment, premises and staff?  Were there contracts of sale and purchase and if so, what do they indicate in terms of intention?  Did either party have a restrictive covenant imposed by the other?  Was there a transfer of contracts and/or work in progress?  What was the consensus between the parties, for example did both parties consider that the sales constituted a transfer of a going concern?  How was the sale arranged or advertised?  Finally it must be considered whether or not there had been a significant break in trading.

Even if the vendor and purchaser companies have a similar name, common shareholders, directors, premises and company secretary it does not automatically categorise the supplies as being a transfer of a going concern.  The precedent cases on these points are Computech Developments v Customs and Excise Commissioners (1992) (Decision No 9798), Bristol Engineering & Hydraulic Ltd v Customs and Excise Commissioners (1998) (Decision No 15431) and Cedac Structures v Customs and Excise Commissioners (1988) (Decision No 3307).

In the Tribunal decision in Sawadee Restaurant v Customs and Excise Commissioners (1999) (Decision No 15933) it is stated that the intentions of the transferor and transferee at the time of the transfer must be taken into account when considering the treatment of the supplies.”

There followed a list of other Tribunal decisions which, PWC contended, without going into any detail, lead only to the conclusion that the supplies by Reese & Sons to the Appellant were not a TOGC.  PWC then set out their arguments, contending, first, that while many factors may be relevant few will in themselves be conclusive as to the nature of the supplies.  The letter continued:

“We contend that the Kenmir principles confirm our beliefs that the supplies did not constitute a TOGC and that when the substance and not the form of the transactions are examined it is clear that Sons simply made taxable supplies of assets and stock.

There was no sale or transfer of goodwill, the vendor’s business name or customer lists.  All staff were made redundant prior to the sale.  No contracts of sale existed thus no indication was made in terms of the intentions of either party.  Neither Sons nor Agricultural had a restrictive covenant imposed by the other nor was there a transfer of contracts or work in progress (see below).  The consensus between the parties was that the sales were merely supplies of assets and stock.  Prior to the sale to Agricultural, all of the stock and a number of the assets were advertised for sale at public auction, of which a small proportion was sold.  We feel that this is tantamount to an asset disposal, the largest proportion of which happened to be to one company.

Prior to the disposal of its assets and stock, Sons was in financial difficulties.  Its turnover relied almost exclusively on the franchise agreement it had with a large agricultural machinery manufacturer, Massey Ferguson.  Agricultural did not take over this franchise when purchasing the assets and stock of Sons, which is not surprising considering that it was not acquiring Sons’ business as a going concern.

Furthermore there was a significant break in trading of nearly two months.  Sons ceased trading on 31 December 1998 whereas Agricultural did not commence trading until February 1999.

Conclusions

The following factors indicate that the sale did not constitute a transfer of a going concern:  there was no transfer of goodwill; there was a cessation of trade for a significant period; and the transactions, as displayed on the invoice, consisted of the sale of the assets and stock and nothing else.  In addition Mr Reese did not intend the supplies to constitute a TOGC.

Furthermore, although some of the activities of E C Reese Agricultural Limited are similar to those that E C Reese & Sons Limited used to undertake, they only form part of the E C Reese Agricultural Limited business.  This is evidenced by the fact that Agricultural did not buy the majority element of Sons’ business, the Massey Ferguson franchise.

Thus when examining both the specific factors involved and the overall situation in which the supplies were made it is clear that no TOGC occurred.”

16.	That was the extent of the involvement of PWC.  Miss Taylor replied to the letter on 16 November 2000.  Put briefly (since counsel for the Commissioners addressed us on the law), she pointed out that a two-month closure would not prevent a TOGC (see Curtis v Customs and Excise Commissioners (1993) (Decision No. 11128), and that Kenmir established that a cessation of trading was of no significance where the activities of the business transferred were capable of being carried on without interruption.  Goodwill was deemed to be transferred if the transferor ceased to exist.  The number of invoices was irrelevant (see Chevenings Ltd v Customs and Excise Commissioners (1990) (Decision No 6171).  As to intention, both parties, Reese & Sons and the Appellant, intended the transaction to achieve what it did achieve, which was a TOGC.  The Massey-Fergusson franchise was no longer in existence when the transaction took place, and therefore could not have been transferred in any event.

The Commissioners’ contentions

17.	Mr Hill provided us with a skeleton argument.  To begin with, he pointed out that under section 49(1)(a) of the 1994 Act, where a business is transferred as a going concern, the transferee is treated as having carried on the business before as well as after that transfer.  It followed that immediately on the transfer, since Reese & Sons had exceeded the registration threshold in the year ending with the transfer, the Appellant became liable to be registered.

18.	The issues, Mr Hill submitted, were, first, was the Appellant carrying on the same kind of business as Reese & Sons?  Secondly, was Reese & Sons trading; was it a going concern?  Thirdly, was the activity capable of being carried on without interruption; did it put the transferee in possession of a going concern?

19.	Dealing with the first issue, Mr Hill referred to Kenmir at page 335, where Widgery J said that 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.”

Widgery J also dealt with the relevance of the transfer of goodwill, premises, customers, and held that the absence of any such assignment would not be conclusive “if the particular circumstances of the transferee nevertheless enable him to carry on substantially the same business as before.”  There was effectively a transfer of the goodwill in the present case because the vendor had prevented itself competing.

20.	On the second question, Reese & Sons was wound up after the sale.  The result was not the same as when assets were bought from a liquidator.  Until that time Reese & Sons had been trading.  The sale was of its remaining stock, equipment for repairs, and vehicles, and also the right to use the same premises.  In so far as there was any goodwill remaining in that company it could be said that it was transferred to a company trading from the same premises.

21.	The transfer did put the Appellant in the possession of a going concern.  Reese & Sons business was capable of being carried on without interruption, because the amount of stock and equipment would be transferred simply by using the same premises, the same telephone number, and two of the same staff. There was a difference in recollection whether the break was two weeks or two months, that break having been arranged so that the transfer would not be a TOGC.  But the question is, was there a break because the business could not be carried on straight away?  The answer to that question was, No.  In Customs and Excise Commissioners v Dearwood Ltd [1986] STC 327, McCowan J held that the correct test was whether the business could be carried on without interruption, not whether it would be so carried on.  Mr Hill referred to Spijkers v Gebroeders Benedik Abattoir CV and Alfred Benedik en Zonen BV Case 24/85 [1986] ECR 1119 (a case relating to rights on a transfer for the purposes of Directive 77/187/EC) in which the transfer of particular tangible or intangible assets were single factors and could not be considered in isolation.  In Customs and Excise Commissioners v Padglade Ltd [1995] STC 602, the Tribunal held that the transfer of a company’s assets for the purpose of obtaining a benefit for that company’s creditors was not a transfer of the business as a going concern, and on appeal Schiemann J held that that was a conclusion to which the Tribunal was entitled to come.

22.	In the present case, Reese & Sons had supplied the Appellant with almost the entirety of its stock and assets, and had then ceased trading and was deregistered and wound up.  The assets included equipment for performing the maintenance services that the Appellant intended to offer.  Reese & Sons principal business had been the sale and maintenance of tractors and farm machinery, which was included in the Appellant’s main business: its application for registration described its proposed business as an agricultural machinery dealer.  The Appellant therefore carried on the same kind of business as Reese & Sons.  The premises were the same, and were owned by Mr Reese, and the two companies used the same telephone lines.  The Appellant was likely to gain Reese & Sons goodwill, or some of it, since the latter had deprived itself of the ability to compete, the same kind of business was being carried on under a similar trading name.  The directors of the two companies were the same.  The Appellant took on one of Reese & Sons two or three employees.  Taking a broad view of the circumstances as a whole, as Schiemann said should be done in Padglade, and looking at the substance rather than the form (Kenmir), the Commissioners contended that there had been a transfer of a going concern.

Conclusions

23.	As PWC pointed out in their letter, there is no statutory definition of a transfer of a 
business as a going concern, and recourse must therefore be had to such learning as is available.  In Kenmir, Widgery J, giving the judgment of the court, said, at page 333E,

“In this court Mr Pain contends that there can be no transfer of a business unless the transaction includes an assignment of the goodwill....  If this argument is correct it might provide a very simple solution to the problem in this case, but we think it would be surprising in the context of this legislation if the presence or absence of a transfer of goodwill were conclusive.  Schedule I to the [Contracts of Employment Act 1963] is concerned with continuity of employment and uses the phrase ‘transfer of a business’ to describe a situation in which a change of employer should not be regarded as a break in the continuity of the 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 Mr Pain’s argument is right, the employees’ accrued rights under the Acts of 1963 and 1965 would be lost unless the transfer included a formal and empty phrase purporting to include goodwill.”

Widgery J then referred to a decision in the Court of Session, H A Rencoule Ltd v Hunt [1967] 2 ITR 475, in which a lessee of a factory sold his stock, fixtures and fittings to a purchaser who obtained a new lease of the factory.  The purchaser also took on the vendor’s former employees and work in progress.  The agreement expressly provided that the purchaser was not purchasing the business and had no right to the previous firm name.  The Court of Session held that there was a transfer of the business.  Lord Clyde said, at page 478,

“The result of this transaction in my opinion was to transfer to Messrs Rencoule ltd everything in Mr Fraser’s business except the name and the debts outstanding due to or by Mr Fraser at the date of the transfer.  In particular the transfer of the work in progress coupled with the obligation to introduce the purchaser to customers of Mr Fraser involved a transfer of the goodwill of his business.  The whole operation necessarily meant a smooth and unbroken continuity between what was happening before and after the transfer.”

Lords Cameron, Migdale, and Guthrie agreed, Lord Guthrie adding that the evidence that the main purpose of the transaction had been to obtain a tenancy of the premises was of no avail if “to achieve that purpose they took over the business conducted in the desired premises.”  Widgery J also referred to C D Ault (Isle of Wight) Ltd v Gregory (1967) 3 KIR 590 DC.  In that case the agreement was for the sale of all the stock and materials as a builder, all the vendor’s plant and equipment, the business premises including fixtures and fittings, and the benefit of contracts of the vendors.  There was no express assignment of the goodwill, but the vendors agreed that they would not be concerned or interested in the building business in that area of the Isle of Wight.  Lord Diplock held, at page 593,

“The agreement which I have read is in my view as plain an example of an agreement for the sale of a business as one could find..  It sells the whole of the stock-in-trade; it sells the plant and equipment; it purports to assign the benefit of all contracts and in effect (the vendors) part with the goodwill of their business in the Isle of Wight by entering into a covenant not to carry on that business any further.”

Having considered those two cases, Widgery J continued,

“We think that the principles applied in these two cases govern the present case also.  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 point in one direction against those which point in another.  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.  Many factors may be relevant to this decision though few will be conclusive in themselves.  Thus if the new employer carries on business in the same manner as before this will point to the existence of a transfer, but the converse is not necessarily true because a transfer may be complete even though the transferee does not choose to avail himself of all the rights which he acquires thereunder.  Similarly, an express assignment of goodwill is strong evidence of a transfer of the business but the absence of such an assignment 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.”

24.	In Customs and Excise Commissioners v Dearwood Ltd [1986] STC 327, McCowan J, having considered the judgment in Kenmir and applied it, continued,

“...the Tribunal has, in the second sentence of their judgment which I have read, used the words ‘would be carried on without interruption’, whereas the proper words for them to have used were ‘could be carried on without interruption’.”

25.	In Spijkers, the Court of Justice held as follows:

“9.	The Netherlands and United Kingdom Government and the Commission ... Consider that the question whether there is a transfer of an undertaking for the purposes of Article 1(1) must be considered in the light of all the circumstances characterising the transaction, such as whether or not the tangible assets (buildings, movable property and stocks) and the intangible assets (know-how and goodwill) were transferred, the nature of the activities engaged in and whether or not those activities had ceased at the time of the transfer.  However, none of those factors is in itself decisive.

10.	The United Kingdom Government and the Commission suggest that the essential criterion is whether the transferee is put in possession of a going concern and is able to continue its activities or at least activities of the same kind.  The Netherlands Government emphasizes that, having regard to the social objective of the directive, it is clear that the term 'transfer' implies that the transferee actually carries on the activities of the transferor as part of the same business.

11.	That view must be accepted.  It is clear from the scheme of Directive No 77/187 and from the terms of Article 1(1) thereof that the directive is intended to ensure the continuity of employment relationships existing within a business, irrespective of any change of ownership.  It follows that the decisive criterion for establishing whether there is a transfer for the purposes of the directive is whether the business in question retains its identity.

12.	Consequently, a transfer of an undertaking, business or part of a business does not occur merely because its assets are disposed of.  Instead it is necessary to consider, in a case such as the present, whether the business was disposed of as a going concern, as would be indicated, inter alia, by the fact that its operation was actually continued or resumed by the new employers, with the same or similar activities.

13.	In order to determine whether those conditions are met, it is necessary to consider all the facts characterising the transaction in question, including the type of undertaking or business, whether or not the business’s tangible assets, such as buildings and movable property, are transferred, the value of its intangible assets at the time of the transfer, whether or not the majority of its employees are taken over by the new employer, whether or not its customers are transferred and 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.  It should be noted, however, that all those circumstances are merely single factors in the overall assessment which must be made and cannot therefore be considered in isolation.

14.	It is for the national court to make the necessary factual appraisal, in the light of the criteria for interpretation set out above, in order to establish whether or not there is a transfer in the sense indicated above.”

26.	Schiemann J, in Padglade, referred to Dearwood, and observed that the fact that the transferor of the business was insolvent was irrelevant.  He continued,

“It was held, and I respectfully agree, that the fact that the taxpayer had an intention in the future to change its business was irrelevant.  The words ‘in the future’ are clearly important, since the transferee’s immediate intention is relevant under article 12(1)(b)(ii) [of the Value Added Tax (Special Provisions) Order 1981].  When answering the question, ‘Are the assets to be used by the transferee in carrying on the same kind of business?’ Evidence of the transferee’s intention will usually be relevant.  This case does not decide the contrary.

Neither of these cases is authority for the proposition that the intention of the transferor of goods is irrelevant when considering whether there was a transfer of a business or the transfer of part of a business.  It is not conclusive one way or the other, but it is one of the facts which the Tribunal is entitled to take into account when taking a broad view of the circumstances as a whole.”

A later passage is also in point:

“The essential part of the [Tribunal’s] decision is contained in the following passage:

‘... In this case the prime purpose [of the sale of the assets] as explained by [the sole shareholder of both transferor and transferee] was to obtain benefit for the creditors by achieving a better price for the goods than would have been obtained had events taken their natural course without the interference of Padglade.... The intention was to sell assets and stock at a value which the director of the vendor company considered to be for its advantage....’

That passage discloses no error of law.  The Tribunal was entitled in principle to take into account the state of mind of both transferor and transferee at the time of the transfer.  The fact that in truth transferor and transferee were controlled by the same man is not legally relevant....”

27.	The Tribunal, in Montrose DIY Ltd v Customs and Excise Commissioners (1988) (Decision No 2658) held that if there is a gap before trading is resumed after the transfer that is a relevant fact but is not conclusive against there being a transfer of a going concern.  The Tribunal said,

“On the facts of the present case the indicators are all part of [the transferor’s] business (namely the do-it-yourself shop) was being taken over as a going concern in respect that nothing had happened to prevent the business being carried on without interruption from September 1986 by the Appellant company and that the delay in the Appellant company’s resumption of the business, while a relevant factor, is of no great weight when all the other factors point in the opposite direction.  From a customer’s point of view the shop had merely been closed for two months (as sometimes happens, for example, for the purpose of reconstruction), and there was nothing whatever to indicate that when the business reopened on 1st December 1986 that there had been any change at all.  The shop, its stock, its fittings and fixtures, staff, its very name, were all the same....”

28.	The same point was dealt with in Curtis t/a Green Baize Snooker v Customs and Excise Commissioners (1993) (Decision No 11128).  Having considered a number of decisions, including Spijkers, Dearwood, and Montrose DIY, the Tribunal continued,

“In my judgment, based on a reading of these cases, it is not determinative of the issue that the business was not open to the public for a period after the date of the transfer because the transferee ... chose to wait for a period for some reason before recommencing the business.  The issue was whether what was transferred ‘could’ be carried on without interruption and not whether it was in fact carried on without interruption....”

29.	The last of the decisions cited in this appeal was Chevenings Ltd v Customs and Excise Commissioners (1990) (Decision No 6171).  That was a case in which the assets had been acquired by the transferee from the liquidator of another company, and not, therefore, from that company itself.  But the Tribunal also held that:

“What Griddlegrove had transferred were a quantity of stock, some fixtures, fittings and equipment, and, apparently, a licence to occupy a part of the grading premises.  That was not all in one transaction; however I agree with Mr Agathangelou’s contention, that if the whole of a part of a business is transferred as a going concern it does not matter whether the transfer is effected in a single transaction or a number of transactions.”

30.	The other cases referred to, particularly in PWC’s letter, were really no more than examples or illustrations, with differences of facts.

31.	From those decisions we derive the following principles.  First, that the Tribunal must look at the whole of the circumstances of the case, and must consider those facts which point to there having been a transfer of a going concern against those which point the other way.  Secondly, we must look at the substance of the transaction, and not its form.  Thirdly, 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, not would, carry on without interruption.  Fourthly, many factors will be relevant in determining the issue, but few if any will in isolation be conclusive.  Fifthly, an intention to change the business in the future is not relevant, but evidence of the transferee’s intention in purchasing the assets may be relevant.  Sixthly, a delay in resuming the carrying on of the business after the transfer is a matter to be considered but is not of great weight and is of little relevance where the facts point to there having been a transfer of a going concern.  Lastly, the fact that the transfer may have been effected by several transactions rather than a single one is of no relevance.  We now turn to the application of those principles to the facts as we find them, which are set out below.

32.	The transferor and transferee were both controlled by the same person, Mr Reese.  For one reason and another, Reese & Sons was in a state of financial crisis in 1998, with poor sales as a result of agricultural disasters which affected the whole country, and had an overdraft of about £60,000.  It had also lost its Massey-Fergusson franchise.  It was at first Mr Reese’s intention to sell the stock, which he said had a value of between £100,000 and £120,000, but no other company could be found which would purchase it.  Mr Reese therefore decided to set up a new and separate company and for Reese & Sons to sell its assets to it.  The Appellant was that new company, and it was going to trade in cattle feed and fertilizers as well as the stock bought from Reese & Sons.  It is clear, therefore, that at least a part of its business was going to be dealing in the machinery bought from Reese & Sons, and carrying out repair work to agricultural machinery, for which it had purchased the equipment from Reese & Sons.  That was the background to the sale.

33.	It is clear that Mr Reese was aware of the tax consequences of making a transfer of a business as a going concern, and intended to take steps to avoid being in that position.  As Miss Taylor said in her letter of 18 September 2000, there is nothing wrong in that.  Reese & Sons therefore sold the whole of its stock and equipment to the Appellant, and then ceased trading and was shortly thereafter wound up.  The sale of the stock and equipment was evidenced in 65 invoices all of the same date: 31 December 1998.  The invoices all included an amount of VAT, which was never paid by Reese & Sons.  There was no written contract of sale.  There was no express sale of the goodwill of Reese & Sons, nor of the benefit of any of its contracts.  There was no evidence of whether the Appellant had fulfilled Reese & Sons outstanding contracts (if any), though it was clear that after ceasing to trade Reese & Sons could not do so.  However, the Appellant traded at all times from the same premises as those at which Reese & Sons had traded, which were owned by Mr Reese.  Further, the name E C Reese was part of the name of the Appellant, and Mr Reese and his wife continued as directors and shareholders of the Appellant.  The Appellant continued to employ at least one of the former employees of Reese & Sons.

34.	After the transfer, there was a period of time during which no trade took place.  This, Mr Reese said, was from 31 December 1998 until some time in mid-February.  There was a dispute about the length of the break:  Mr Reese maintained at all times that it was two months, and Mr Gillam said more than once that the length was discussed and that Mr Reese had said that it was two weeks.  There was, according to Mr Gillam, some evidence (none of which was produced) to shew that trading had gone on by the Appellant in January 1999.  In any case, as Mr Reese said, and we accept, for some of the time the computer was away being reprogrammed for the new company’s requirements.  It was also the Christmas and New Year holiday period.

35.	Considering those facts, it is difficult to see that any of them point otherwise than in the direction of the transfer by Reese & Sons having been that of its business as a going concern to the Appellant.  It seems to us that the only point that might possibly have been in favour of the Appellant’s case was that the original need to sell the assets of Reese & Sons was that that company was in financial straits, was unable to trade, and was prohibited from selling Massey-Fergusson stock.  But adopting that course was a second best, and a very inferior one at that: the sale of assets worth in excess of £100,000 for only £58,000.  The purpose of the transfer was to close down the business of Reese & Sons, and to realise its stock and equipment as advantageously as possible, through another company which was not prohibited from selling Massey-Fergusson stock.  There was also the intent to reclaim VAT on the sale if the tax avoidance plan had been successful.  Mr Reese’s valiant attempt to avoid the transfer of a going concern failed at every turn.  In our view, the retention of Mr Reese’s name and the continuing of the trade at the same premises had the effect of transferring the goodwill of Reese & Sons.  The fact that there were 65 invoices makes no difference in our view to the nature of the transaction.  The break between the transaction and the resumption of trade, and we use the word resumption advisedly, made no difference at all, since there was no reason why Mr Reese should not have continued, had he chosen to do so, trading with the Appellant on 31 December 1998.  The reason why he did not do so was in order, or so he hoped, so to arrange matters that there was not a transfer of the business as a going concern.  In our judgment, all the relevant factors in this case point to the transfer of Reese & Sons business to the Appellant as a going concern.

36.	For the above reasons, this appeal must be dismissed.  At the end of the hearing, Mr Hill said that the Commissioners would not be seeking costs if they were successful.  Accordingly, we make no direction as to costs.

37.	It is regretted that there has been delay in issuing this decision.  It was completed in or about early May 2003, and signed by the Chairman later in that month.  Whether it was sent out and was lost in transit, or what happened to it, inquiries have failed to reveal.

ANGUS NICOL
CHAIRMAN

RELEASED:

LON/00/730