20503

VAT – registration – transfer of a going concern? – yes – appeal dismissed.

LONDON TRIBUNAL CENTRE

	BROOKES HAIR LIMITED	Appellant

-	and –

	HER MAJESTY’S COMMISSIONERS OF 
	REVENUE AND CUSTOMS 	Respondents

				Tribunal:	Richard Barlow (Chairman)
						Keith Dugdale FCA

Sitting in public in Norwich on 3 October 2007

Mr P Raven KPSK chartered certified accountants for the Appellant 

Mr S Chambers of the office of the general counsel and solicitor to the commissioners for the Respondents

© CROWN COPYRIGHT 2007

DECISION

1.	In this appeal Brookes Hair Limited appeals against a decision contained in a letter dated 19 December 2006 by which the respondents notified the appellant that they had decided to register it for VAT from 7 July 2006.  By a notice received by the respondents on about 3 October 2006 the appellant had applied to register from an unspecified date on the basis that its taxable supplies had exceeded the threshold for registration on 23 September 2006 (which, if accepted by the respondents, would have resulted in registration with effect from 1 November 2006).

2.	The difference between the parties results from the assertion by the respondents that the appellant had succeeded another business by way of a transfer of a going concern.  The appellant denies that was the case.

3.	The legal position is as follows.

4.	Section 49(1) of the VAT Act 1994 reads as follows:

“49(1) 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 ; …

5.	The meaning of the phrase “transfer as a going concern” is not defined in the Act but it has been considered in many cases before the tribunal and by the High Court in Customs and Excise Commissioners –v- Dearwood [1986] STC 327.  The approach to answering the question whether a transaction is a transfer of a going concern that has been consistently adopted, is based on the following passage from an employment case, Kenmir –v- Frizzell [1968] STC 329:

In deciding whether a transfer 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 that 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.

6.	We find the facts to be as follows.  These findings are based on the documents we have seen and on the evidence of Mrs Elizabeth Baker who became involved in the company at its incorporation and who is the wife of Mr Baker to whom we are about to refer.

7.	From its date of incorporation the appellant has carried on a business of hairdressing from premises in Bishop’s Stortford.  It is necessary to explain the history of those premises.  For more than eighteen years they have been a hairdressing salon trading under the name of “Brooks” (though the limited company when it was incorporated became Brookes Hair Limited).  Until shortly before the incorporation of the appellant Brooks had been owned and operated as a three man partnership consisting of Messrs Baker, Reijs and Ripsher and the business had operated from the premises at Bishop’s Stortford and from premises at Much Hadham.  The Much Hadham premises were taken on by the partnership at a more recent date than the Bishop’s Stortford premises.  Longer ago, the partnership had consisted of Mr Baker and another man and the lease of the Bishop’s Stortford premises was held in that other man’s name though the landlords were fully aware of the actual situation as they were the three man partnership’s solicitors.

8.	The two premises were operated by the partnership as one business and it appears the financial controls were somewhat lax as the partners did not really know whether the individual premises were operating at a profit or whether one was subsidising the other and there were some troublesome debts owed by the partnership.

9.	Mr Ripsher left the partnership at short notice near the end of June 2006 and took over the Much Hadham premises and has operated a hairdressing business from there since that time.  Mrs Baker, giving evidence on behalf of the company, made a number of allegations against Mr Ripsher, in particular that he had taken with him two members of staff from the Bishop’s Stortford premises and had told many of the customers who usually attended the Bishop’s Stortford premises that their bookings had been transferred to Much Hadham.  She also alleged that he had taken over the lease at Much Hadham without the other partners’ permission.  The allegations amount to a breach of fiduciary duty and a lack of good faith in his capacity as a partner.

10.	Not having heard evidence from Mr Ripsher we are reluctant to make any findings about him and so in fairness to the appellant we will make our decision based on an assumption that the appellant’s allegations are correct rather than a finding that they are.

11.	At or near the end of June 2006 the business at Bishop’s Stortford was undoubtedly in something of a chaotic condition.  The three man partnership had come to a sudden end and the Bishop’s Stortford premises were being run with a reduced staff and customer base and the bank had frozen the account because of a possibility that debts would not be paid.

12.	The remaining two partners set about establishing a limited company.  Mr Reijs took out a mortgage on his home to finance the company and Mrs Baker became a shareholder with her husband and Mr Reijs and began to be involved in running the new company’s business in a more professional manner from the financial point of view than had been the case under the partnership.  In fact it has proved possible to run the Bishop’s Stortford salon profitably.

13.	The appellant’s case is that, given the upheaval caused by Mr Ripsher’s departure and the manner of it, the business of the company should not be treated as having been transferred to it as a going concern but rather that of a new business starting from scratch.

14.	The factors in favour of that contention are that two out of five staff and one out of three partners had left and that those two staff were key members.  At first there was very little trade as the customers had been enticed away.  The finances of the company’s business were on an entirely different basis and all stock purchased after 1 July 2006 were treated as proper to the company although it was apparently not incorporated until 7 July.  As at the date the company took over, whether that was 1 July or 7 July, the stock of the partnership was virtually nil and there was no good will as the partnership was devoid of assets and had been running at a loss immediately before the split.

15.	As against that, factors in favour of there having been a transfer of a going concern are, that the company commenced to carry on a hairdressing business which was essentially the same as that previously carried on; some change in emphasis as far as the type of styling that is done is of no real significance in our opinion.  The same premises and name were used by the company as had been the case with the partnership.  The same customer base (at least in terms of volume if not identity of customers) was also apparently available.  This is clear from the fact that as early as 2 October 2006, when the company applied to register for VAT, it was projecting takings of £250,000 in the twelve months then beginning and that in the period between 1 or 7 July and 2 October its turnover had already exceeded the registration limit which was then £61,000.  If the departure of Mr Ripsher had badly affected the business it is clear that it did so for only a short time.       

16.	Our conclusion is that the business of the Bishop’s Stortford salon was transferred as a going concern and as part of the partnership’s business and that accordingly the company was liable to register from the date of transfer based on the previous turnover of the partnership.  As the company was not incorporated until 7 July 2006 that is the correct date of registration.  If the three man partnership was dissolved before 7 July the two remaining partners clearly continued in business and there would have been successive transfers to which the same facts and conclusions would apply but that does not affect the date of registration for the company as it cannot have taken over until it was incorporated.

17.	The appeal is therefore dismissed and as Mr Chambers made no application for costs we make no order in that respect.

CHAIRMAN

RELEASED: 7 December 2007

LON/07/0453