19633

REGISTRATION – Transfer of business as a going concern – Transferor business compulsorily registered for VAT – No appeal by transferor – Transferee business a limited company- No evidence or notification of transfer supplied by Appellant to Commissioners at time of transfer – Kenmir Ltd v Frizzell applied – Appeal dismissed

LONDON TRIBUNAL CENTRE

	BEGUM EASTERN OCEAN LIMITED	           Appellant

-	and –

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

				Tribunal:	MISS J C GORT (Chairman)
						MR J G ROBINSON

Sitting in public in London on 8 & 9 May 2006

Mr R A Elmore, company secretary, for the Appellant 

Mr Matthew Barnes of counsel, instructed by the Solicitor’s office, for the Respondents

© CROWN COPYRIGHT 2006

DECISION

1.	The appeal is against a decision of the Commissioners of 12 July 2005 to register the Appellant for VAT on the grounds that the Appellant’s business was the subject of a transfer of a going concern from Eastern Ocean Tandoori Takeaway.  The grounds of appeal were that the Appellant company, Begum Eastern Ocean Ltd, had nothing to do with Eaton Spice, a company set up by the alleged transferor.  

The law

2.	The Value Added Tax Act 1994 (“VATA”) Schedule 1 states that:

	(1)	…
(2)	Where a business carried on by a taxable person is transferred to 	another person as a going concern and the transferee is not registered 	under the Act at the time of the transfer, then, subject to sub-paragraph 	(3) to (7) below, the transferee becomes liable to be registered under 	this Schedule at that time if:

(a)	the value of his taxable supplies in the period of one year ending at the time of the transfer has exceeded £58,000; or
(b)	there are reasonable grounds for believing that the value of his taxable supplies in the period of 30 days beginning at the time of the transfer will exceed £58,000.

(3)	A person does not become liable to be registered by virtue of sub-	paragraph (1)(a) or (2)(a) above if the Commissioners are satisfied that 	the value of his taxable supplies in the period of one year beginning at 	the time at which, apart from this sub-paragraph, he would become 	liable to be registered will not exceed £56,000.

VATA section 49 states:

Where a business carried on by a taxable person is transferred to another person as a going concern, then –

For the purpose of determining whether the transferee is liable to be registered under this Act he shall be treated as having carried on the business before as well as after the transfer and supplies made by the transferor shall be treated accordingly.

The facts

3.	 The transferor was a Mr Abdor Miah, who traded as Eastern Ocean Tandoori Takeaway, and had been registered as a sole trader for VAT purposes.  He had transferred the business to Begum Eastern Ocean Ltd on 28 July 2004.  

4.	Officers of the Commissioners had visited the transferor’s premises on 23 November 2002 and again on 21 February 2003. In the course of the visit on 23 November 2002 the officers had spoken to both the transferor and the manager, who was the transferor’s brother, a Mr Afsor Miah.  A Mr Mannan Miah was also working there and a Mr Allie Hussain.  It was noted on this latter occasion that the average price per order had fallen from the £25 and £21 noted on previous visits, to £13.34.  Observations and test purchases were carried out on 10, 14 and 15 March 2003 by the officers.  It was recorded that, of a minimum of 67 meals sold over the three visits, at least 22 of these did not appear on the records when these were subsequently examined.  On 8 April 2003, the officers inspecting the records were not satisfied with the accuracy of the takings record.

5.	On 5 August 2003 officers of the Commissioners met the transferor and his accountant and produced to them a summary of their visits, which showed that of 12 test purchases only three were declared.  The transferor was also informed that the number of meal tickets seen in the records was considerably less than the number of takeaway purchases seen by the officers.  

6.	There followed correspondence and a further meeting between the transferor, his accountant and officers of the Commissioners.  It was accepted by the transferor that the business should be VAT registered, but as the business had been closed for a while, sales had dropped off and he asked for the records to be reviewed.  Following further correspondence, by a letter dated 23 March 2004 the Appellant was informed that the transferor’s business was liable for VAT with effect from 1 June 2001.  By a letter dated 7 April 2001 he was informed that the would be compulsorily registered from that date.  That decision was not appealed by the transferor.  

7.	Mr Abdul Miah, the subsequent purchaser of the business, came to Mr Elmore, who was a printer who had been involved in printing the takeaway menus for Mr Abdor Miah when he ran the restaurant, with income tax problems and Mr Elmore offered him advice as a friend.  Mr Elmore himself had no experience as an accountant, but nonetheless he advised Mr Abdul Miah, who was intending purchasing the business, to set up a limited company in order to separate it entirely from the previous business.  Mr Elmore subsequently became a director of the Appellant company.

8.	The landlord of the premises had, in about 2003, broken in and changed the locks, claiming that the rent was unpaid.  This meant the business was closed down for a period of about three to four weeks and subsequently it never picked up substantially.  It was because of the failure of the business that Mr Abdor Miah had decided to discontinue it.

9.	The accounts for the previous business up until 30 April 2000 were produced to the Tribunal.  These showed a turnover of £33,924.  We also saw a letter dated 25 October 2005 from HM Revenue and Customs addressed to Mr Elmore in respect of the Appellant business.  That letter gives total sales of £29,007.40 from 28 July 2004 to 31 May 2005, and records indicate that a further £14,222.95 was taken prior to 1 November 2004.  In October 2005 an officer of the Bedford Value Added Tax office had inspected the books and he compiled a sheet of calculations for the previous business up until 2003 giving a turnover of £43,082.  On 3 May 2006 there was a meeting between Mr Elmore and Mr Rickwood, of the Inland Revenue, and there was adjudged to have been a 33% suppression rate on the turnover in 2003, which would have made the turnover at that time £57,428.  

10.	In the Autumn of 2005, for reasons of which we were not given, Anglian Water had turned off the water to the restaurant premises. This meant that staff could not wash their hands or kitchen equipment and, because of this the Appellant was prosecuted and convicted under the Health and Safety Act.  Mr Abdul Miah was fined £2,100 and ordered to pay £1,976.70 costs by the local magistrates.  This was widely reported in the local press and as a consequence it is said that the business collapsed.  The business had not been trading since November 2005 and  was currently for sale.  

11.	Following the transfer of the business to the Appellant on 28 July 2004, a visit had been made to the Appellant on 9 March 2005 by officers of the Commissioners.  Staff were spoken to on that occasion.  On 10 March 2005 a phone call was received from Mr Elmore, who stated that Afsor Miah, a brother of the transferor, was also a director of the Appellant company.  Mr Elmore contended that the turnover was well below the VAT threshold.  

12.	On 15 June 2005 a direction was issued by the Commissioners for both the Appellant and Abdor Miah, trading as Eaton Spice to register for VAT.  Eaton Spice was the name of a business which had been started up in about November 2003 by Mr Abdor Miah, following his closing down of the Eastern Ocean Tandoori Takeaway.  

13.	There followed a reconsideration of this decision, following a letter from the Appellant of 6 June 2005 appealing the direction to register.  The reconsideration letter dated 12 July 2005 was to the effect that there was a transfer of a business as a going concern to the Appellant and it is against this decision that the Appellant appeals.  This decision was itself reviewed in a letter of 30 August 2005 when the decision was upheld.

14.	Mr K J Kiwerski, an officer of the Commissioners based in Cambridge gave evidence to the Tribunal. 

15.	Mr Kiwerski had himself visited the premises in 2001 and 2002.  He had also examined the records in January 2003 and paid a further visit in February 2003.  He had discussed the results of the cash ups and the observations with the accountants and the Miah brothers.  He had made the decision that the original business should be registered for value added tax and had compulsorily registered the business in the name of Abdor Miah on 1 June 2001.  

16.	On 9 March 2005 Mr Kiwerski had again visited the premises.  He had spoken to an employee named Mukal Miah, who said he had worked there for over a year, a period which spanned both the sole proprietorship in the name of Abdor Miah and the new business.  He had seen a bailiff’s report in which it was stated that Abdor Miah had sold the business complete with assets to Begum Eastern Ocean Ltd on 28 July 2004.  Mr Kiwerski could see no change in the trading pattern, the menu being the same, as was the trading name and the logo.  The same kind of food was being served also.  In addition Mr Abdor Miah occasionally worked part-time for the Appellant.

17.	The figures which had been used by the Inland Revenue to calculate the turnover for the period 2003 were not based on Mr Kiwerski’s figures, but on income tax returns for the year ended 2002, at a time when the threshold for registration for VAT was £54,000.  Taking into account the suppression, the previous business was therefore in excess of the VAT threshold at that time.  With regard to the letter of 25 October 2005 from Mr Rickwood, the declared takings he was applying were net of tax, and therefore the total sales were not £43,000, but were £29,000, plus £5,000 plus £14,000 i.e. £48,000.  Mr Kiwerski  was not prepared to say whether the sum of £2,118 which appeared on Mr Rickwood’s summary as output tax (referred to in the letter of 25 October 2005) should properly be included or not. The figures Mr Kiwerski did accept did not take into account the suppression rate of 33%, which brought the turnover well above the annual registration rate for the period.

18.	Mr Kiwerski had held a meeting with Mr Elmore and had conducted correspondence with him. He himself had issued the direction that the Appellant should be registered under the same registration as Eaton Spice Takeaway, because at the time he thought that all three businesses were closely bound by organisational, financial and economic links. He did not receive a completed form VAT 1 in respect of the Appellant business, and therefore wrote to it informing it that it had been compulsorily registered for VAT with effect from 28 July 2004.  Following receipt of further information from the Appellant, the Eaton Spice Takeaway was removed from the VAT registration, and this was not therefore an issue before the Tribunal.  

The Respondents’ case

19.	The Respondents’ case was that there were clear links between the transferor and the Appellant company.  The businesses operated from the same premises, and one of the directors of the Appellant company was the brother of the transferor.  The transferor still worked part-time for cash in hand for the Appellant business.  Mukal Miah, who had worked for the transferor, also worked for the Appellant.  The trading style of the business continued, and the Internet website carried the same name. 

20.	In particular the Respondents relied on the fact that the transferor had been informed by the Commissioners that he was liable to be registered for VAT, and he had not appealed that decision.  

21.	It was submitted that it was for the Appellant to provide evidence, available at the time of transfer, which ought to have persuaded the Commissioners to grant an exception at that time under Schedule 1(3) of the VATA.  

22.	The Respondents further relied on the test purchase evidence in relation to the transferor’s business which indicated a suppression rate of 75% or more.  The revised calculations from the Inland Revenue indicated a suppression rate of 33⅓%, which was not accepted by the Commissioners as being correct.  

23.	The effect of the transfer to the Appellant company was to put it in possession of a going concern, it having carried on the previous business without interruption.  The Tribunal was referred to the case of Kenmir Ltd v Frizzell [1968] 1 AR 414 in which Widgery J said:

“… regard must be had to the substance of the transaction rather than its form; consideration being given to the whole of the circumstances … the vital consideration is whether the effect of the transaction is to put the transferee in possession of a going concern, the activities of which he could carry on without interruption.”

It was submitted that in the present case the reality was that the restaurant continued to serve the same food, employed some of the same staff, and operated in the same way. The Appellant had not put forward any documents in relation to the transfer itself. The takings after the transfer were irrelevant, because those only went to whether or not the Appellant should deregister. Whilst it was accepted that the figures produced by the Appellant in relation to his trading after the transfer showed that he was trading on the borderline, this was irrelevant to the decision the Tribunal had to make.

The Appellant’s case

24.	On behalf of the Appellant we were asked to accept that there was nothing to show what the level of trading had been at the time of the transfer, given that the previous owner had finished trading in 2003. The Appellant had not been in possession of any accounts or books or figures, and had no means of properly assessing the value added tax position other than from its own trading.  The Appellant itself  had always traded well below the limit.

Reasons for decision

25.	In this case we have heard no evidence from Mr Abdul Miah, the proprietor of the business.  We have seen nothing in writing to show us that the transferor business was not operating between 2003 and 2004.  All we have to go on is the uncontested evidence of Mr Kiwerski about his visits and the reports of his officers following observations of the transferor’s premises. These show that there was a high suppression rate and that the previous business should have been registered for value added tax.  

26.	The fact that the transferor never contested the registration of his business is of itself evidence that there was likely to be a need to register the Appellant business.  There is scant evidence before us to show that the Appellant was not able to carry on the activities of the transferor without interruption, as is required.  Whilst we do not doubt that Mr Elmore is an honest man, we have not been given any written evidence to show that at the time of the transfer the Appellant’s taxable supplies in the period of one year beginning at the time of the transfer, would not exceed the £58,000 limit. The Commissioners were not at the relevant time provided with any such evidence, so it cannot be said that they have failed to exercise their discretion under Schedule 1(3) of the VATA. The appropriate course for the Appellant would have been to apply for deregistration at the time of the transfer. The nature of the Appellant’s business is by and large indistinguishable from that of the transferor. There is nothing to indicate that it could not carry on the same activities as the transferor, without interruption, albeit we were told the place was redecorated, and the dictum of Mr Justice Widgery (as he then was) in Kenmir Ltd v Frizzell (supra) applies.

27.	In all the circumstances there is insufficient evidence before us for the Appellant to satisfy us, as it is required to do on the balance of probabilities, that it did not take over the previous business as a going concern and that it should not have been registered for value added tax as from 12 July 2004. The issue of deregistration is not before us.  In all the circumstances this appeal is dismissed.

28.	No order for costs.

MISS J C GORT
CHAIRMAN

RELEASED: 28 June 2006

LON/05/784
££Begum Eastern Ocean Ltd v  Revenue & Customs [2006] UKVAT V19633 (28 June 2006)