When a business is sold to a purchaser who uses that business to manufacture supplies only for another member of its VAT group, the purchaser is not carrying on "the same kind of business" as it is no longer making taxable supplies. The sale is therefore incapable of being a transfer of a going concern (TOGC).
A recent decision of the UK First-tier Tax Tribunal ("FTT") dealt with the interaction between the TOGC provisions and the VAT grouping rules. The taxpayer, Intelligent Managed Services Limited (“IMSL”), was operating a business consisting of the supply of information technology infrastructure and know-how to the banking sector. The principal activities were to offer a hosted version of an integrated retail banking solution ("banking platform"), services that are fully taxable. IMSL then entered into negotiations with Virgin Money Management Services Limited ("VMMSL") in respect of the sale of its business.
Prior to the transfer, IMSL had terminated all customer relationships as well as all supplier contracts in relation to its banking platform activities. The main asset transferred was the banking platform that VMMSL intended to use to supply banking processing services to Virgin Money Bank Limited (an entity that is part of the same VAT group as VMMSL) which, in turn, would provide banking services to retail customers.
The transfer agreement stated that the transfer of the business was a TOGC. The UK tax authorities (HMRC) contended that ISML had ceased to carry on a trade of offering a banking platform and that following the transfer, it only had one customer: its group member, supplies to whom were ignored for VAT purposes, so that TOGC treatment could not apply.
The FTT accepted HMRC's contentions. Relying on the CJEU decision in Zita Modes, it stated that for there to be a TOGC, the transferee must intend to operate the business transferred. Where there is a VAT group, the representative member group is treated as carrying on the business of the other members, but supplies by one member of the VAT group to others are disregarded for VAT purposes. VMMSL was not the representative member of the group, and while it may have intended to operate the business transferred, the fact that after the transfer, it was making only supplies for the other VAT group members meant that it was not carrying on the same kind of business as IMSL. Therefore, the transfer was not a TOGC.
The FTT rejected the taxpayer's argument that the interaction of the UK VAT group rules and the TOGC provisions were contrary to the EU law principles of fiscal neutrality, proportionality, equal treatment and effectiveness. It also disagreed that the "same kind of business" test in UK law was too restrictive, on the basis of EU law as applied in Zita Modes.
It is possible that the taxpayer may decide to appeal against this decision to a higher court, but in the meantime, when contemplating a business transfer where TOGC treatment is expected, the parties must consider carefully the nature of supplies to be made in the future, particularly if any or all of them will consist of support services in a VAT group. If there is a danger that TOGC treatment could be denied, the business should, if possible, continue to make supplies for third parties for a period following the transfer, or the business should be transferred to a non-group company so it can make taxable supplies.