A recent decision in the UK Upper Tribunal has provided important insight on the extent to which the fiction of a VAT group under UK legislation has to be given effect in the context of a transfer of a going concern (“TOGC”).
For a transfer of assets to crystallise as a TOGC under UK law, there are a number of conditions that are required to be satisfied. One of the main conditions requires that the assets being transferred are to be used by the transferee in carrying on the “same kind of business” as that carried on by the transferor. For example, if the transferor used the assets to manufacture and sell widgets to third parties, then the transferee must similarly use the assets for the manufacture and sale of widgets to third parties.
The “same kind of business” requirement has, historically, been thought to pose a particular problem in the context of the transfer of assets to a transferee who is a member of a VAT group, and who will use the assets to make intra-group supplies only. For example, in circumstances where the transferor used the assets to manufacture and sell widgets to third parties, and the transferee uses the assets for the manufacture and sale of widgets to other members of its VAT group.
This problem arose because under UK VAT grouping rules, a VAT group is treated as a single taxable person (in the form of the representative member) and supplies of goods and services between members the VAT group are disregarded for VAT purposes. The UK tax authority (“HMRC”) had interpreted this to mean that the business carried on by the transferor effectively ceased for VAT purposes when acquired by a transferee who would make intra-group supplies only. In these circumstances, the transferor could not be considered to be carrying on the “same kind of business” and as a result any such transfer could not crystallise as a TOGC.
The above approach represented a very literal interpretation of the UK VAT grouping rules in the context of a TOGC. Clearly, the transferee, as a matter of fact, would be carrying on a business which is the same as that carried on by the transferor (for example the manufacture and sale of widgets). Nonetheless, HMRC were clear in their position that within the single taxable person fiction created by the UK VAT grouping rules, the “same kind of business” could not be identified.
This position has been challenged, and overturned, by the UT in the case of Intelligent Managed Services Ltd v HMRC  UKUT 341 (TCC). The UT were asked to consider what the correct VAT treatment was on the transfer by Intelligent Managed Services Ltd (“IMS”) of its banking support services business to Virgin Money Management Services Ltd (“VMS”).
VMS was a member of a VAT group (the “Group”) and would use the assets transferred to it by IMS solely to provide services to Virgin Money Bank Ltd (“VMB”) which was another member of the Group. It was not intended that VMS would make any supplies to non-Group members.
Expectedly, HMRC’s position was that the transfer of the business by IMS to VMS could not crystallise as a TOGC. This position was based on two primary arguments. Firstly, that the transfer of assets to VMS should properly be viewed as a transfer to the Group (being the single taxable person), and therefore the Group had carry on the “same kind of business” as IMS. Secondly, VMS’s supplies within the Group had to be disregarded when looking at the business of the Group, and only the external supplies should be considered. They argued that the only external supplies of the Group were those of retail banking, which was not the “same kind of business” carried on by IMS.
The UT stated that it was wrong, in principle, to identify the nature of a VAT groups activities solely by reference to the external supplies it made. In particular, the UT pointed out that the activities of VMS contributed directly to the economic activities of the Group as a whole. Even though the banking support services of VMS were provided internally within the Group, they still formed an integral part of the external retail banking services provided by the Group. The UT recognised that the single taxable person fiction meant that VAT effects of intra-group supplies were disregarded, this did not change the nature of those individual businesses carried on with the Group. The Group should be treated as carrying on all the businesses carried on by its members, which remained separate businesses as a matter of fact.
The UT therefore held that, the transfer of assets by IMS crystallised as TOGC. The effect of VMS being within the Group was that the Group was treated as the transferee, but that it was also treated as carrying on each of the businesses of the members of the Group (including VMS banking support services). Nothing in the VAT grouping rules could alter the fact that the Group continued to use the assets transferred to it by IMS in the “same kind of business” as that carried on by IMS.
The decision appears to mean that, where all other relevant conditions are met, TOGC treatment should apply equally to transfers to VAT group members and to companies not in VAT groups. This is important as it opens up the possibility that transfers which would previously have been though not to qualify as a TOGC can indeed take effect as such, and will be of particular interest to clients who are within VAT groups that are unable to recover all (or part) of the input VAT they suffer (for example banks and financial institutions as was the case with VMS and the Group).
It is understood the decision will not be appealed by HMRC.