Changes to the Transfer as a Going Concern (‘TOGC’) rules
In its Brief 11 (2016) HMRC have announced changes as a result of the decision in the Upper Tribunal (‘UT’) case of Intelligent Managed Services Limited (‘IMSL’). The case concerned the transfer of a business into a VAT group.
IMSL had been developing a banking platform. It sold this part of its business to Virgin Money Management Services Limited (‘VMMSL’) who continued to develop the software and then supplied software services to Virgin Money Bank Limited (‘VMBL’). VMBL then used this software to supply retail banking services to its customers. At the time of the acquisition, both VMMSL and VMBL were members of the same VAT group. HMRC’s view was that the transfer of IMSL’s business to VMMSL was subject to VAT because IMSL’s business ceased when the assets were acquired.
HMRC’s policy as noted in its guidance in paragraph 4.3 of its Notice 700/9 Transfer of a Business as a Going Concern, had been that where a member of a VAT group acquires a business and that acquired business subsequently only makes supplies to other members within the VAT group the acquisition cannot be treated as a TOGC.
HMRC policy was based on their view that as all members of a VAT group are treated as one person, all subsequent supplies were made by and to the same person (the representative member) and as a result the sellers’ business effectively ceases on transfer and so cannot meet the conditions to be a TOGC.
The UT disagreed with HMRC and concluded the sale was a TOGC on the basis that an acquisition by a member of a VAT group does not change the nature of the businesses carried on by the individual members whose activities remain separate as a matter of fact.
As a result of the UT decision, HMRC now accepts that if a business is transferred to a member of a VAT group and both:
- That member intends to continue to use the acquired assets to operate the same kind of business in providing services to other group members
- Those other group members use the services to make supplies outside of the group
Then, subject to the other applicable conditions that have to be met, the transfer will qualify as a TOGC.
In addition, HMRC has updated its policy regarding the situation where transfers take place out of a VAT group. Previously, HMRC’s view was that there could not be a TOGC when the sole activity of the business transferred is the making of supplies from one group member to another. As a consequence of the IMSL decision HMRC now accept that where, were it not for the VAT grouping rules, a business exists, the normal TOGC rules apply to transfers out of a VAT group.
HMRC have advised that it will update Notice 700/9 accordingly.
HMRC also state in Brief 11 (2016) that potentially businesses who have been denied TOGC treatment in these circumstances, where land or property formed part of the assets transferred, can make claims for overpaid Stamp Duty Land Tax (‘SDLT’) because the SDLT would have been incorrectly calculated on the value including the VAT.
The Brief also comments on changes to TOGC treatment regarding ‘Non-established taxable persons’ (any person who is not normally resident in the UK, who does not have a UK establishment and, in the case of a company, is not incorporated there.)