20039
Value Added Tax – whether “transfer of a going concern” – sale of hotels with licences, stock, goodwill etc – purchase financed by sale and leaseback of heritage – Art 5(8), 77/388  EEC Sixth Directive – VAT (Special Provision) Order, SI 1995/1268, Reg 5 – Appeal allowed.

EDINBURGH TRIBUNAL CENTRE

	MORTON HOTELS LTD	Appellant

	- and -

	THE COMMISSIONERS FOR 
	HER MAJESTY’S REVENUE & CUSTOMS	       Respondents

			Tribunal:	 (Chairman):  K MURE, QC
					 (Members):   C. Barbour, CA., ATII	
                                                                             K Bruce Lockhart, WS, Advocate

Sitting in Edinburgh on 2 February 2007.

for the Appellant		Julian Ghosh, QC and Ms Elizabeth Wilson, 						Barrister

for the Respondents	Iain Artis, Advocate

© CROWN COPYRIGHT 2007.

DECISION

INTRODUCTION
	This is an appeal against the Decision of the Respondents not to treat the purchase of three hotels by Swallow Hotels Limited from the Appellant as a transfer of a going concern (“TOGC”) in terms of particularly their letter of 30 November 2004.   (See Documents 5, 6 and 10.)    The Respondents’ reason is that Swallow financed the purchase by way of a sale and leaseback arrangement entered immediately on acquisition of the heritable subjects, and thus the same kind of business was not continued by it.

At the outset parties’ representatives indicated that this dispute related only to the heritage.   For the purposes of this Appeal it was now accepted by the Respondents that all the other assets had been transferred in the context of a TOGC.    

THE LAW
Article 5(8) of the Sixth Directive provides:-
“In the event of a transfer, whether for consideration or not or 	as a contribution to a company, of a totality of assets or part 	thereof, Member States may consider that no supply of goods 	has taken place and in that event the recipient shall be treated 	as the successor to the transferor.    Where appropriate 	Member States may take the necessary measures to prevent 	distortion of competition in cases where the recipient is not 	wholly liable to tax.”

Regulation 5 of the VAT (Special Provision) Order, SI 1995/1268 states:-
“(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….”
The effect of Reg 5 is to take the transfer of the affected property outwith the VAT system for transferor and transferee.   (See Abbey National PLC v C&E [2001] STC 297 – para 24 of Opinion of the Advocate General.)

	In the course of the hearing we were referred helpfully to the following further authorities –
Zita Modes Sarl, Case C-497/01, ECJ; [22003] ECR Page 1-	14393
Kenmir Ltd v Frizzell [1968] IWLR 329
Kwik Save Group plc v C&E  [1994] VATTR 457
Fox t/a The Cavendish Hotel v C & E [2003] UKVAT  V18441
C & E v Dearwood Limited [1986] STC 327

Reference was made also to the Respondents’ Notice 700/9 entitled “Transfer of a Business as a Going Concern”.    

THE FACTS	
A Statement of Agreed Facts was concluded.   That and the items of correspondence lodged as documents set out the circumstances and terms of the sale by the Appellant to Swallow in December 2004 and the sale and leaseback arrangements concluded with Info Properties Limited.

In essence it is accepted that when the Appellant ceased to operate the hotels, Swallow took over this role.   Immediately on conclusion of the purchase Swallow entered the sale and leaseback to finance it.    The premises were operated as hotels before and after the transfer without interruption.   (See para 9 of Agreed Facts.)

It may be noted that there has been no election to waive the exemption from VAT on the sale of the hotels as heritage (See para 11).   i.e. the “Option to Tax”.
PARTIES’ SUBMISSIONS
The Appellant’s Counsel provided us with a Skeleton Argument which sets out helpfully his views, and to which we refer.  (Paras 26 and 27 may be disregarded as the dispute now relates only to the heritage.)    He argued that the facts as agreed and the documentation all indicated the sale of the heritage as falling under the TOGC “umbrella” and that the nature of the financing arrangement did not alter this.    The terms of the missives as affecting the licence, stock, goodwill and staff, showed that Swallow was buying a business, and the sale and leaseback arrangements were simply the means of financing the purchase.    Mr Ghosh argued that the assets continued to be used in the same kind of business.   However, Reg 5 (1) (a) (i) did not require that they be used in the same way.   Nor need the legal interest in the assets necessarily remain the same.   A result which depended on what was in effect the nature of the loan security arrangements would defeat the purpose of the TOGC provisions.   On any view, he continued, the property interest in the hotels was still used to carry on the business as a means of finance.

The Appellant’s argument founded strongly on Fox where a TOGC was upheld.   There the original tenancy of the public house had ceased.   A new tenancy had been created.   What was important was that the business of the public house continued in substance even although there was not (unlike the present case) a legal agreement between the outgoing and incoming owners.    

Mr Ghosh relied also on Kenmir Ltd v Frizzell  in support of the proposition that it is the substance (not the form) and effect of the transaction in putting the transferee in possession of a going concern, which he can carry on without interruption.   He distinguished the decision in Kwik Save, relied on by the Respondents, in that its circumstances differed from the present case.    There, there was an intermediary between the two businesses running the shops i.e. between the seller and Kwik Save’s subsidiary.  (By comparison in the case of the shops where Kwik Save itself took over the business, a TOGC was not in dispute.)

In reply Mr Artis submitted on behalf of the Respondents that the TOGC conditions were not satisfied.   What is crucial according to the Respondents is the significance of the sale and leaseback.    Swallow sold the hotels without continuing to trade.  At no time did it operate as owner/occupier of the hotels.   There was a material change in the nature of the business operated by Swallow as compared with the Appellant’s business.    The new owner did not operate the hotels as hotels.    The assets were not used in carrying on the same kind of business as they were re-sold immediately after the sale of the business took place for purposes of raising finance.

Mr Artis compared the circumstances of the present case to the scenario set out in para 2.3.3 of the Respondents’ Notice 700/9 entitled “Transfer of a Business as a Going Concern” (Document 6).  Here, there had been a series of immediately consecutive transfers as para 2.3.3 envisages.   Swallow had not carried on business as owner of the hotels.

He compared the circumstances of the present case to those in Kwik-Save, where there had been two transfers i.e. seller to Kwik Save, then to Kwik Save’s subsidiary company.   There the TOGC provisions were not applicable.   This decision was apt in the present case.  

DECISION
We consider that the arguments of the Appellant are well-founded and we find that the acquisition of the hotels by Swallow from the Appellant was a transfer of these as a going concern in terms of Reg 5(1)(a)(i) of the VAT (Special Provisions) Order 1995.   It follows that we reject the Respondents’ argument that the immediate conclusion by Swallow of the sale and lease-back arrangements deprived its purchase of the hotels of this classification.

Having regard to the terms of Reg 5(1)(a)(i) the requirement is for the transferred assets to be used by the transferee in carrying on the same kind of business.   We agree with Mr Ghosh that there is no further requirement (as the Respondents’ argument might imply) that the assets are to be used in the same way by the transferee or that any proprietorial interest acquired by him has to be retained in the same form.    While it would seem that the hotels continued to be used in the “….same kind of business….” in the present case, it may be (as Mr Ghosh suggested) that these words go beyond what Article 5(8) of the Sixth Directive envisaged.   (See para 10 of Appellant’s Skeleton Argument and Zita Modes Sarl,  para 45 of ECJ’s decision.)

	We agree with the reasoning of the Tribunal in Fox.  There, one tenancy ended and a new tenancy was granted by the landlord in favour of the party taking over the public house business.    Crucially “the business continued without any gap or interruption”.    There, the Appellant was the successor in fact to the previous tenant by virtue of a fresh lease.   There was no legal relationship between the outgoing tenant and the Appellant as incoming tenant (see para 3 of the Decision).   Accordingly there was no sale of goodwill.   In the present case we consider that there is a much closer relationship between transferor and transferee.

Further, we consider that we should pay regard to the “substance rather than …form” of the transaction and its “effect” (Widgery J in Kenmir v Frizzell at p 335.    This decision and Dearwood both indicate that the test for a TOGC is whether the business could be carried on without interruption after the transfer.)

We consider that the Tribunal decision in Kwik-Save is distinguishable.   There had been an intermediate party between seller and the “Tate” companies, the sub purchasers from Kwik Save.

Thus, in this Tribunal’s view, what is material in the present case is the factual outcome of the transfer so far as the running of the business is concerned.   In the present case the hotels continued to be run as hotels and the terms of the missives anent the licences, stock, goodwill, staff contracts etc seem to have been framed to secure this continuing pattern of business.   Moreover, the terms of the lease-back acknowledge the position of Swallow continuing as the hotelier.   Swallow’s interests as licensee are assured.   Staff responsibilities remain with Swallow too.   We agree with Mr Ghosh that the status of Swallow as leaseholder rather than heritable proprietor does not alter the running of the business for the purposes of Regulation 5(1)(a)(i).   We consider that the sale and leaseback was in reality simply a financing arrangement (somewhat similar to the former bond and disposition in security, commonplace in loan arrangements.)

COSTS
It was agreed that costs should be awarded to the successful party.   Accordingly we make an award of costs to the Appellant, to be taxed, failing agreement, in terms of Rule 29(3).

Finally the Tribunal would thank parties’ representatives for the detailed and helpful presentation of their respective arguments.

KENNETH MURE, QC
				       CHAIRMAN
						
                                   RELEASE:     6 MARCH 2007.

EDN/05/37