19222

VALUE ADDED TAX — takeover of a going concern — sale of plant and machinery by one company to another — vendor company predominantly engaged in hire of plant alone — purchaser company predominantly engaged in hiring plant with drivers — VAT (Special Provisions) Order 1995, art 5 — whether takeover of a going concern — yes — appeal dismissed

MANCHESTER TRIBUNAL CENTRE

HCL EQUIPMENT LIMITED	Appellant

- and -

HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

		Tribunal:	Colin Bishopp (Chairman)
				John Lapthorne

Sitting in public in Birmingham on 20 July 2005

Grahame Davies, accountant, and Peter Hawley, technical adviser, for the Appellant

Sara Williams, counsel, instructed by the Acting Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2005

DECISION

1.	This appeal arises from the purchase by the Appellant, HCL Equipment Limited (“HCL”), of plant and machinery to the total value of £2,538,000, excluding VAT, from Derby Trading Limited, which traded as Morton Plant Hire (“Morton”). HCL and Morton treated the sale as a taxable supply, and in due course HCL sought credit from the Respondents for the input tax it had incurred in the transaction, some £444,150. The Respondents have refused to give credit because, they say, the sale amounted to the transfer of a going concern. If they are right, VAT should not have been charged, and correspondingly the claimed credit is not available to HCL. They contend that the sale comes within article 5(1)(a) of the Value Added Tax (Special Provisions) Order 1995 (SI 1995/1268) which, so far as material, reads:
“… 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 …”
2.	Before us, HCL was represented by its accountant, Grahame Davies, and by an adviser from its auditors, Peter Hawley. The Respondents were represented by Sara Williams of counsel. We heard no oral evidence, though Mr Davies and Mr Hawley explained the factual background, which Miss Williams did not challenge. We were provided with various documents. The facts, as they were explained to us, are as follows.
3.	Morton was a company controlled by Mr David Unwin. Until 2000, it traded predominantly in the hire of plant, though it had a few drivers in its employment whom it hired out from time to time with the machinery. In that year, Mr Unwin’s son, also David, decided to form HCL, which thereafter traded predominantly in the hiring out of plant with drivers. Morton ceased that type of business, and no longer employed drivers; it merely hired out plant and thus father and son were not in competition. Frequently Morton hired equipment to HCL, which in turn hired it on to a customer, but with a driver. By about September 2002, HCL accounted for almost all of Morton’s business. It was agreed at that point between father and son that HCL would buy from Morton all of the plant it then had, while Morton would cease to trade in the plant hire business altogether—Mr Unwin senior had other business interests which, we were told, he continues to pursue. Prices for each item of equipment were agreed, and the machinery changed hands, although this was, in a sense, a notional process since the two companies traded from the same address, and some of the equipment remained at Morton’s customers’ premises, waiting to be removed following the conclusion of the hire. We were told that, at the time of the sale, none of the equipment was the subject of a contract of hire with a customer.
4.	HCL’s case is that the provisions of article 5(1)(a) are of no application, since there was merely a sale of plant, and not of a business—nothing else, such as goodwill, or office equipment was transferred—and that the plant, once transferred, was not to be used, and has not been used, in the same business as that carried on by Morton. There is, it says, a material difference between plant hire, as carried on by Morton, and contracting, in which HCL engages. The former involves no more than the supply of plant, and the owner requires no more than that the hire charge is paid and that the machine is returned in good condition at the end of the agreed period. The latter, however, requires the hirer to undertake a task—of excavation, for example—using his equipment and driver; or to provide a driver who will work to the customer’s instructions, but who remains responsible for the safe and efficient operation of the machinery. Only occasionally does HCL hire equipment alone, and then only for special purposes for which its own drivers do not have the necessary qualifications, such as work on railway lines.
5.	Mr Hawley referred us to the decision of Judge Kirkham, sitting in the Technology and Construction Court at Birmingham, in Baldwins Industrial Services plc v Barr Limited (2002, unreported) in which a distinction was drawn between simple hire, on the one hand, and the provision of machinery with a driver, which amounts to the supply of a service, on the other. He was able to show that the Inland Revenue, as it then was, accepted that the distinction as it was drawn in that case was relevant for the application of first year allowances.
6.	The Respondents rely on two other decisions. First, they point to the comment of Widgery J in an employment case, Kenmir Ltd v Frizzell [1968] 1 All ER 414 at 418:
“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 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.” 
7.	Second, they rely on the decision of this tribunal in Farm Facilities (Fork Lift) Ltd v Customs and Excise Commissioners [1987] VATTR 80 that the mere fact that there are differences between the manner in which the business was carried on before the sale, and the manner in which it is conducted after the sale, does not preclude the conclusion that there has been a takeover of a going concern. The tribunal in that case followed the pragmatic approach of Kenmir v Frizzell, and does not seem to have been referred (as we were not) to Customs and Excise Commissioners v Dearwood Ltd [1986] STC 327, in which McCowan J determined that the test was not whether the purchaser would or did carry on the same business, but whether he could do so. Although the word used in Kenmir v Frizzell is also “could”, the statutory provision falling for consideration there was different. The decision in Dearwood has been doubted by this tribunal on several occasions, since it does not reflect the statutory wording, that “the assets are to be used”, a conclusion perhaps reinforced by a reading of sub-paragraph (1)(b), which, albeit in a different context and for a different reason, treats capability and intention as discrete tests. Plainly HCL could have carried on the same business as Morton, but we propose to ask ourselves instead whether it did so.
8.	The test, as it is set out in the Special Provisions Order, is not whether the purchaser carries on, after the purchase, the same business, but the same kind of business; as we see it, that test brings within the ambit of the takeover of a going concern a case in which the successor business is sufficiently similar for it to be possible to say that there is recognisable continuity. It is not necessary that the two businesses are identical, merely that there is a reasonable resemblance between them. If the proprietor of a Chinese take-away were to sell it, and the purchaser sold instead Indian take-away food, or pizzas, there would in our view be a takeover of a going concern, whereas if he converted the premises into an ironmongery, there would not. Although there would, in either case, be a shop both before and after the transfer, the sale of take-away food is, we think, substantially the same business, regardless of the type of food sold, while the sale of ironmongery is a different kind of business altogether.
9.	Applying that distinction to the facts of this case, we must ask ourselves whether we are satisfied that the hiring of machinery with a driver is so different from the hiring of machinery without a driver that they must be regarded as different businesses. We recognise that the Respondents, when applying the provisions of the Capital Allowances Act 2001, draw a distinction between the two, but they do so in a different context. In the context with which we are concerned, we do not think there is a significant difference between the two activities. It is true that hiring a machine alone is not identical to hiring out a machine with a driver; but the essence of the transaction is the same, namely the provision of a machine for the purpose of its being used in the customer’s own business. That in the one case no driver is provided and in the other one is seems to us to be a difference of detail rather than of substance. The Appellant’s business is the hiring of machinery with, in most (but not all) cases, a driver; it is not the hiring of drivers, with incidental machinery for the performance of the work. We are satisfied that the dominant character of HCL’s business is the hiring of plant, and that it is not significantly different from that carried on by Morton.
10.	It follows that HCL took over a going concern, that VAT was not due on the consideration paid for it, and that the appeal must be dismissed. We make no direction in respect of costs.

COLIN BISHOPP

CHAIRMAN
RELEASE DATE: 3 August 2005

MAN/03/0825