UK and International Tax news
HMRC And TOGC Update
Sunday 31st July 2016
HMRC has recently issued Brief 11/2016 following the judgment of the Upper Tribunal in the case of Intelligent Managed Services Limited (IMSL) which concerned the transfer of a business into a VAT group.
Generally the supply of the assets of a business is taxable at the standard rate of VAT. However, subject to certain conditions, the supply of the assets of a business is treated as neither a supply of goods nor a supply of services when these are transferred together with all, or part, of that business as a going concern (article 5 VAT (Special Provisions) Order 1995). At the time of the transfer the transferee must intend to use the assets as a continuation of the business activity of the transferor.
Corporate bodies which share a common control may choose to register as a VAT group in which case supplies of goods or services between members of a VAT group are ignored for VAT purposes (s.43(1) VAT Act 1994). All onward supplies made by the VAT group are treated as made by the representative member.
HMRC’s policy has been that where a member of a VAT group acquires a business, and thereafter only makes supplies to other members of that VAT group, the acquisition cannot be treated as the transfer of a business as a going concern [TOGC] for the purposes of article 5, VAT (Special Provisions) Order 1995. This is because with all subsequent supplies treated as made to and by the same person, the transferor’s business ceases at the point of transfer. Consequently the supply of the assets of the business by the transferor to the transferee is subject to VAT.
In the case of Intelligent Managed Services Limited ([2015] UKUT 0341 (TCC)), IMSL had been developing a banking platform. It sold this part of its business to Virgin Money Management Services Limited (VMMSL). VMMSL continued to develop the software and then supplied software services to Virgin Money Bank Limited (VMBL). VMBL used these services to supply retail banking to its customers. VMMSL and VMBL were at the time members of the Virgin Money Group VAT group (VMG). HMRC considered that the supply of the assets of IMSL’s business to VMMSL was subject to VAT because that business ceased at the point of transfer.
The UT disagreed with this conclusion, saying that the transfer of IMSL’s banking support services business to VMMSL was a TOGC. In particular, it considered that while VAT grouping treats the representative member as carrying on the business of each member of that group, it does not change the nature of the businesses carried on by the individual members whose activities remain separate as a matter of fact. Looked at objectively, VMMSL had not intended to liquidate the transferred assets but rather to carry on the same kind of business as IMSL as part of its own banking support services. Consequently, in its judgment, there is nothing in the VAT group rules that could prevent the transfer of IMSL’s business to VMMSL from being a TOGC.
HMRC now accepts that if a business is transferred to a company in a VAT group and the company intends to continue to use the transferred assets to operate the same kind of business in providing services to other group members and those other group members use the services to make supplies outside of the group, then the transfer is a TOGC at the first stage.
HMRC has also revised its policy relating to transfers out of a VAT group. Where, were it not for the VAT grouping rules, a business exists, the normal TOGC rules apply to transfers out of a VAT group. This supersedes guidance in section 4.3 of Public Notice 700/9, which will be amended in due course.
If you would like to discuss the above in more detail, please contact Keith Rushen on 0207 486 2378.
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