20392
VAT — transfer of going concern — public house — whether transferred as going concern by previous tenant / licensee where he vacated property prior to it being sold by its then landlord to appellant’s landlord with fixtures and fittings and appellant’s landlord sold on fixtures and fittings to appellant — appellant paid nothing for goodwill and had no contact with previous tenant / licensee — finding that transfer was of assets not of going concern — appeal allowed

MANCHESTER TRIBUNAL CENTRE

 
 	
					LEE SCOTT HARRISON	Appellant

- and -

THE COMMISSIONERS FOR
				HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

Tribunal: David Demack (Chairman)
					 Jon Denny		
					
Sitting in public in Manchester on 11 September 2007

Joanne Vicary of counsel, instructed by Messrs Langdale BCS Ltd, accountants of Lancaster, for the Appellant 
 
Nigel Poole of counsel, instructed by the Solicitor and General Counsel for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2007

DECISION

1.	Mr Harrison is the tenant of The Masons Arms (“the Pub”), a public house in Ingleton, North Yorkshire.  He appeals against two assessments by Her Majesty’s Commissioners for Revenue and Customs (“the Commissioners”), one of 15 May 2005 to VAT of £4,860, and the other of 28 September 2004 to a late registration penalty of £217.  Effectively, the former decision indicates that he should have been registered for VAT from 12 November 2003.  The Commissioners say that he took over the business carried on by Mr Scott Gordon at the Pub on that date, which he disputes.  He had applied to be registered from 1 August 2004, estimating the supplies he expected to make in the next 12 months as £60,000.  
2.	The issue arises in the following way.  Section 49 of the Value Added Tax Act 1994 (“VATA”), so far as relevant, provides as follows:
“Where a business, or part of a business, carried on by a taxable person is transferred to another person as a going concern, then—

(a)	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 or part of the business before as well as after the transfer and supplies by the transferor shall be treated accordingly; and

(b)	any records relating to the business which, under paragraph 6 of Schedule 11, are required to be preserved for any period after the transfer shall be preserved by the transferee instead of by the transferor, unless the Commissioners, at the request of the transferor, otherwise direct.

3.	Paragraphs 1(2)(a) and (3) of Schedule 1 to VATA as in force in November 2003, dealing with liability to be registered, provide as follows:
“(2) 	Where a business[, or part of a business,]4 carried on by a taxable person is transferred to another person as a going concern and the transferee is not registered under this Act at the time of the transfer, then, subject to sub-paragraphs (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 £56,000; or

(b) …

(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 £54,000.”

4.	The combined effect of those provisions is that if, as the Commissioners contend, Mr Harrison took over his business as a going concern on 12 November 2003, he was liable to be registered on that date (not being already registered) if his predecessor was a taxable person, and the value of his predecessor’s taxable supplies in the 12 months to that date exceeded £56,000.  Mr Harrison does not claim that he could have satisfied the Commissioners that the value of his taxable supplies in his first 12 months of trading would not have exceeded £56,000, so that he accepts that he would have been  liable to be registered because of sub-paragraph 2(a). He would not have been let out under sub-paragraph (3).
5.	It is common ground that Mr Gordon was registered for VAT, and was thus a taxable person.  But we have no evidence of the value of the supplies he made in the year to 31 October 2003. It does not follow that because he was registered, the total value of his taxable supplies in that year exceeded the registration threshold. However, as Miss Vicary, counsel for Mr Harrison, was in no position to establish the value of those supplies, and the Commissioners did not disclose them, we assume that the value of his supplies was above the threshold. 
6.	We take the facts from an agreed bundle of copy documents, no oral evidence being presented to us.  Until late in 2003, the Pub was owned by Mitchells of Lancaster (Brewers) Limited (“Mitchells”).   On 30 July 2002 Mitchells let it to Mr Gordon, who became its licensee.  He ran the Pub until a date unknown to us, but which we believe to have been early in November 2003.  On 11 November 2003, Mitchells contracted to sell the Pub to Mr Richard Harry Lord and Mrs Patricia Lord, his wife.   Although the contract expressed the sale to be subject to but with the benefit of Mr Gordon’s 2002 tenancy agreement, we find that Mr and Mrs Lord obtained vacant possession of the Pub.  The contract also provided for completion of the sale to take place on 12 November 2003, for the sale to Mr and Mrs Lord of the fixtures and fittings in the Pub, as listed in an inventory prepared by Mitchells’ valuers, Messrs Batemans, for the sum of £7,995; and for the sale to them of all wet stock, dry stock and glassware on the property at completion, as valued by Batemans.  Whether there was any such stock or glassware, we are unable to say. It certainly did not feature in any transaction in which Mr Harrison was involved.
7.	We do, however,  find that the fixtures and fittings and any wet and dry stock and glassware purchased by Mr and Mrs Lord were the property of Mitchells. Whether they had previously been in the ownership of Mr Gordon, we cannot say, no evidence being adduced in relation thereto.  
8.	We make our finding that Mr and Mrs Lord obtained vacant possession of the Pub on the basis of Mr Lord alone having on 12 November 2003 entered into a four year tenancy agreement of it to Mr Harrison, and it being common ground that he took possession of the Pub on that date.  Mr Lord also sold fixtures and fittings to Mr Harrison for £7,995 plus VAT of £1,398.25.  The documents before us do not indicate whether the fixtures and fittings sold to Mr Harrison were those sold earlier to Mr and Mrs Lord, but, since the price of them, ignoring VAT, was the same in both transactions, it is not unreasonable to assume that they were. We proceed on the basis that they were.
9.	Following the sale to Mr and Mrs Lord, Mitchells proceeded to remove their cellar and bar equipment from the Pub.  Mr Lord then arranged for Daniel Thwaites & Co. Ltd (“Thwaites”), brewers of Blackburn, to supply beer, wine and spirits, Mr Harrison being contracted to purchase such supplies from Mr Lord or his nominees.  Thwaites replaced the cellar and bar equipment with equipment of its own.  We presume that Thwaites subsequently supplied all wet stock to Mr Harrison.
10.	It is also common ground that the Pub was in a run down and unhygienic state when purchased by Mr and Mrs Lord, and that prior to 11 November 2003 environmental health officers had taken steps to prevent any sale of prepared food from it.  There was some suggestion that it was closed prior to 11 November 2003, but no more.
11.	On Mr and Mrs Lord purchasing the Pub, they and / or Mr Harrison refurbished it and carried out some improvements to it.  We were not provided with details of the works carried out, but accept that the Pub was closed for some time in November 2003 for the purpose.   When it re-opened for business we cannot say; the limited evidence before us points to a date late in November 2003.  Mr Harrison continued to trade under the name of The Masons Arms.
12.	No information about the Pub licence was given to us.  We assume that it was a full on-licence which was held by Mr Gordon until he departed, and was then transferred to Mr Harrison.  Nor were we given any information as to whether staff employed by Mr Gordon were re-employed by Mr Harrison.
13.	Mr Harrison paid nothing for any goodwill that might have attached to the Pub, and entered into no contract with Mr Gordon.  The only payment he made on taking possession of the Pub was that for fixtures and fittings.
14.	On taking over the Pub, Mr Harrison did not immediately register for VAT, believing he was not liable to register.  But by June 2004, his turnover was such that he was required to register.  He therefore made application to do so on 5 July 2004 and initially was registered with effect from 1 August 2004. Subsequently, the Commissioners determined that he should have registered on 12 November 2003, and changed his date of registration to that date.  They then proceeded to assess him to the tax and penalty under appeal.
15.	The approach to be applied by the tribunal in cases of this nature has long been accepted as that indicated by the Divisional Court in Kenmir Limited v Frizzell [1968] 1 All 13 R 414, to which we were referred by Mr Poole, who appeared for the Commissioners.  Widgery J said at page 418:-
	“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 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.”

16.	The emphasis there is on whether the business could, not ‘would’, be carried on without interruption after the transfer, as was pointed out in the value added tax case of Commissioners of Customs and Excise v Dearwood Ltd [1986] STC 327. 
17.	In Young v Daniel Thwaites & Co Ltd [1977] ICR 877, Phillips J recognised that where, as in the instant case, a public house is said to be the subject of a transfer of a going concern it poses particular problems, saying of the authorities cited to him:
	“… they stress the distinction between the mere transfer of property, on the one hand and, on the other, the transfer of a trade or business.  But what may be called the ordinary run of cases is not very material here, because one is dealing with licensed premises and the business which is carried on in the premises, because they are so specialised that the business that is carried on unless there is substantial alternations, for instance by turning it into a steak house, or a restaurant, or something of that kind is likely to be more or less the same.” 
18.	It was against that background that Mr Poole, counsel for the Commissioners invited us to follow four decisions of the tribunal involving licensed premises where it was held that the transfer was that of a going concern. They were Donald McPherson t/a Comet Bar v Commissioners of Customs and Excise  (1993) Decision No. 10427, Melvin Nathaniel Fox t/a The Cavendish Hotel v Commissioners of Customs and Excise (2003) Decision No. 18441, GA & P Andrews v Commissioners of Customs and Excise (1995) Decision No 13310 and Andrew Thomas Harber v Commissioners of Customs and Excise (1994) Decision No. 12979.  In each case there was  a short break in trade between the former licensee’s business coming to an end and the appellant’s business commencing, but no change in landlord. Mr Poole submitted that those authorities showed that a small gap between Mr Gordon’s closing of the business and Mr Harrison’s re-opening of it did not mean that there was no transfer of the business as a going concern.  
19.	Very properly, Mr Poole also drew our attention to other tribunal cases in which transfers of licensed premises had been held not to be transfers of going concerns, but rather purchases of assets enabling the transferee to carry on business. However, as each case in this area turns on its own particular facts, we need not deal with them
20.	Essentially, Mr Poole maintained that there need not to be a single transaction by transferor to transferee to constitute the transfer of a going concern; nor need there be a formal transfer of goodwill.  In the instant case, he submitted that all the elements essential to the transfer of a business as a going concern, namely the transfer of the tenancy of the Pub, the business continuing under the same name (the name of the Pub), and the fact that it was the same sort of business, were present.
21.	Miss Vicary submitted that there was no transfer sufficient to satisfy section 49 (1) of VATA as there was no link between Mr Gordon as transferor and Mr Harrison as transferee; and on the facts Mr Harrison could not have continued to trade.
22.	She accepted that VATA did not require a single transfer or any particular method of transfer to constitute that of a going concern, but, equally, she submitted that it specified no other method of identifying such a transfer. Reading section 49 of VATA in a commonsense way suggested that it applied to a single transfer.  But even if it were read as indicating that a direct transfer between transferor and transferee was not essential, Miss Vicary maintained that there must be a degree of continuity between those persons – a constituent that was absent in the instant case. How could Mr Harrison have known that he was required to register? He had had no contact whatsoever with Mr Gordon; the freeholders were entirely different; and there was no link between Mr Harrison’s freeholder and Mr Gordon.
23.	Miss Vicary accepted that a break in trade for the refurbishment of premises did not prevent a business being transferred as a going concern, but submitted that the test to be applied was: could the transferee have continued trading?  In the instant case, she maintained  that, viewed in the round, all the circumstances indicated that Mr Harrison could not have continued to trade on taking possession of the Pub: the bar and cellar equipment were removed, and the restrictions imposed by the local authority prevented the sale of food.
24.	We find that Mr Harrison could not have continued to trade on taking over the Pub. On Mitchells selling it, that company immediately proceeded to remove its bar and cellar equipment. Without it, the Pub could not have continued to trade, and it was not permitted to sell prepared food. We accept that the break in trade in the instant case was short; but break there was.  However, that in itself did not prevent there being no transfer of a going concern
25.	Neither party to the appeal drew our attention to the Commissioners’ own advice as to what constitutes the transfer of a going concern where, as here, there are consecutive transfers of a business. In Public Notice 700/9/02 the Commissioners deal with “Consecutive transfers of business” at paragraph 2.3.3 in the following way:
“There must not be a series of immediately consecutive transfers of the business.  Where A sells its assets to B who immediately sells those assets on to C, because B has not carried on the business the TOGC provisions do not apply to any of the transactions.  This means that the sales take their normal VAT liability (taxable or exempt).
26.	Assuming, as we do, that the Commissioners’ advice correctly interprets the law, that must apply with even stronger reason in a situation such as that with which we are dealing.  In the instant case, there was no privity of contract between Mr Gordon and Mr Harrison.  Indeed, Mr Harrison having had no contact with Mr Gordon, would not have known whether Mr Gordon was VAT registered, so that, in our judgment, it would have been impossible for him to know whether he was required to be registered on commencing business if the Pub was transferred to him as a going concern.
27.	We are not satisfied that Mr Harrison acquired the business of the Pub. In our judgment, what he acquired were assets. There was no transfer of the tenancy of the Pub; Mr Gordon’s tenancy came to an end, by what means we know not; there was then a change of landlord; and the new landlord granted a new tenancy to Mr Harrison. Nor was there any transfer of goodwill. Whether or not any goodwill attached to the Pub, again we know not. If it did, it seems to us that it was merely by good fortune. We accept that Mr Harrison carried on the same sort of business as Mr Gordon but, as Phillips J pointed out in the Young case, transfers of licensed premises are special cases to which case law is “not very material” and even if originally the fixtures and fittings acquired by Mr Harrison were the property of Mr Gordon, they were not transferred by the latter to the former.
28.	Adopting the language of paragraph 2.3.3 of Notice 700/9/02, and taking account of the whole of the circumstances to which we have referred, as there was a series of immediately consecutive transfers of the assets of the Pub, we hold that Mr Harrison was not put in possession of a going concern.  We therefore allow his appeal.  We direct the Commissioners to pay his costs of and incidental to and consequent upon the appeal, to be assessed in default of agreement.
29.	We cannot conclude without mentioning the minimal, i.e. totally inadequate, contribution made by the Appellant’s representatives to the bundle of copy documents and their failure to ensure that Mr Harrison was called to give oral evidence.  Those factors greatly contributed to our inability to make important findings of fact.  Fortunately for Mr Harrison they did not prevent us reaching a conclusion in his favour. 

DAVID DEMACK
CHAIRMAN
Release Date: 10 October 2007
MAN/05/0604