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European courts have been arguing exactly what constitutes TOGC and what does not; our VAT expert delves into the detail.
In the world of VAT, transactions are divided into two main groups: supply of goods, or supply of services. Thanks to this distinction VAT is the most common tax and everyone in modern world has or will have to deal with VAT (or sales tax) either as formal taxpayer or as factual taxpayer (when paying for goods or services where VAT was added to final price).
However there are certain types of goods, services or transactions that are exempted or excluded from VAT, including the transfer of a going concern (TOGC).
TOGC, according to EU Directive and the Value Added Tax (Special Provisions) Order 1995 (SPO), is neither a supply of goods nor a supply of services. Consequently TOGC is not subject to VAT and the transfer of a business can be done without adding any VAT to the final price.
But certain conditions must be met to be able to benefit from TOGC:
- Assets that are transferred by a person have to be used by the transferee in carrying on the same kind of business as that carried on by the transferor.
- Where the transferor is a taxable person, the transferee has to be already a taxable person, or become taxable person immediately as a result of transfer.
- In case of transfer of part of a business, this part has to be capable of separate operation.
This all seems to be pretty clear - but it can get a little bit trickier when the transferee is a member of a VAT group. Who actually is the transferee in this scenario – the VAT group or a member of the group? What is the nature of services rendered by a member of the group to other members of this VAT group?
These questions had to be answered by the Upper Tribunal in case Intelligent Managed Services Ltd v HMRC [2015] UKUT 0341 (TCC). In this case the transferor was selling banking support services business to member of the VAT group, which was providing banking processing services to another member of the VAT group.
The First-Tier Tribunal decided that in given background TOGC cannot take place. It was justified by nature of VAT grouping. In VAT group, representative of the group is treated as taxpayer, whereas transactions between members of the group are disregarded for VAT purposes. As a result the transferee, according to FTT, did not operate the same kind of business as that undertaken by the transferor. Consequently conditions to treat transaction as TOGC had not been met.
This approach was not supported by the Upper Tribunal, which reminded about the importance of the case decided by the Court of Justice of the European Union in Skandia America Corp (USA), filial Sverige v Skatteverket (Case C-7/13) (2014) ECLI:EU:C:2014:2225, [2014] All ER (D) 125 (Sep). The main conclusion from this judgment is that a transaction performed with a member of the VAT group should be considered as a transaction with this group itself.
Therefore, for the purpose of the Intelligent Managed Services Ltd v HMRC case, it has to be analysed whether the VAT group as a whole met conditions to treat acquisition of the transferor’s business as TOGC - especially whether the same kind of business is carried on by the VAT group is carried on by the transferor.
Nevertheless, the above test has to be performed by taking into account transactions performed within the VAT group. In other words, although transactions within the group are disregarded for VAT purposes, they must be taken into account to determine whether TOGC takes place. The fiction of the VAT group did not extend to treating the group as carrying on a different, amalgamated business, in which the separate businesses of the group lost its individual identity.
This judgment raises interesting points regarding the nature of a VAT group and its implications for TOGC purposes. A VAT group should be treated as a collection of business entities and transactions performed between members of the group should be treated as those performed by the VAT group for TOGC purpose.
Therefore a VAT group needs to check closely whether activities performed between members can pass ‘the same kind of business’ test to benefit from TOGC VAT treatment.
Please note that courts are still inconsistent on this matter and it cannot be excluded that some time down the line we will witness judgment presenting totally opposite point of view.