Upper Tribunal Rules Out TOGC Status in Revenue and Customs v. Royal College of Pediatrics and Child Health: Upper Tribunal (Tax and Chancery Chamber)

Introduction

The case of Revenue And Customs v. Royal College Of Pediatrics And Child Health & Anor ([2015] UKUT 38 (TCC)) delves into the complexities of Value Added Tax (VAT) regulations, specifically concerning the Transfer of a Going Concern (TOGC). This dispute arose when Coleridge (Theobalds Road) Ltd sold a property to the Royal College of Paediatricians and Child Health, both parties initially treating the sale as a TOGC to benefit from VAT exemptions. The subsequent contention with Her Majesty's Revenue and Customs (HMRC) centered on whether this transfer indeed qualified as a TOGC, thereby determining the VAT obligations.

Summary of the Judgment

The Upper Tribunal (Tax and Chancery Chamber) reviewed HMRC's appeal against the First Tier Tribunal (FTT) decision, which had favored Coleridge and the Royal College by recognizing the transaction as a TOGC and ruling the VAT assessment as time-barred. Upon examination, the Upper Tribunal distinguished this case from precedent cases like Dartford Borough Council v HMRC, concluding that the transfer did not constitute a TOGC. The Tribunal determined that while the freehold property was transferred, the essential element of transferring a business or economic activity was absent. Consequently, the sale was treated as a standard transaction subject to VAT, leading to the dismissal of HMRC's appeal.

Analysis

Precedents Cited

The judgment extensively references European and UK case law to interpret the TOGC provisions:

Zita Modes (Case C-497/01): Established that both the totality of assets and the intention to continue an economic activity are crucial for a transfer to qualify as a TOGC.
Schriever (Case C-444/10): Reinforced that the transfer must enable an independent economic activity and that the purchaser's intentions are relevant.
Kenmira v Frizzell [1968] 1 All ER 414: Emphasized a substance-over-form approach in legal interpretations.
Dartford Borough Council v HMRC [2007]: Initially supported the TOGC status by demonstrating the seamless transfer of business operations and intentions.
Palad Property Group Case (Not Binding): Referenced to highlight differences in transaction nature.

The Upper Tribunal found that the Dartford case was distinguishable due to the unique relationship between BAPM and the Royal College, which was absent in Dartford.

Legal Reasoning

The Tribunal's legal reasoning centered on the definition and requirements of a TOGC:

Substance Over Form: The Tribunal prioritized the actual economic activity transferred over the formal agreements in place.
Economic Activity Transfer: Merely transferring the freehold property was insufficient; there needed to be a transfer of business operations or economic activity.
Intentions of Parties: The Tribunal considered the intentions behind the transaction, especially the special relationship between BAPM and the Royal College, which indicated that the leasing agreements were not part of Coleridge's business operations.
Role of Agreements: The conditional lease agreement with BAPM was deemed part of the sale transaction rather than an element of a business transfer.

Consequently, the Tribunal concluded that the essential element of transferring a business or economic activity was missing, thereby negating the TOGC status.

Impact

This judgment sets a significant precedent in VAT law by clarifying the boundaries of what constitutes a TOGC. It emphasizes that:

Simply transferring a property does not automatically qualify as a TOGC.
There must be a genuine transfer of business operations or economic activities.
The intentions and relationships between parties play a crucial role in determining the nature of the transaction.

Future cases will likely reference this judgment to assess the validity of TOGC claims, particularly in scenarios involving complex relationships between buyers and third parties.

Complex Concepts Simplified

Transfer of a Going Concern (TOGC)

A TOGC refers to the transfer of a business that can continue operating without significant interruption. For VAT purposes, qualifying as a TOGC can exempt the transaction from VAT, provided certain conditions are met.

Substance Over Form

This legal principle means that the actual substance or reality of a transaction takes precedence over its formal structure. Courts assess the true nature and intentions behind transactions rather than solely relying on their outward form.

Economic Activity

This encompasses all activities related to the production, distribution, and consumption of goods and services. For a TOGC, there must be a transfer of such activities to ensure the business continues operating seamlessly.

Delegated Legislation

These are laws made by an individual or body under powers given to them by an Act of Parliament. In this case, Article 5 of the VAT (Special Provisions) Order 1995 serves as delegated legislation defining TOGC parameters.

Conclusion

The Upper Tribunal's decision in Revenue And Customs v. Royal College Of Pediatrics And Child Health & Anor underscores the stringent requirements for a transaction to qualify as a Transfer of a Going Concern. By meticulously dissecting the nature of the transaction and the relationships between the involved parties, the Tribunal reinforced the principle that both the transfer of assets and the continuation of economic activities are essential for TOGC status. This judgment serves as a pivotal reference point for future VAT disputes, emphasizing the necessity of a genuine business transfer beyond mere property transactions.

Upper Tribunal Rules Out TOGC Status in Revenue and Customs v. Royal College of Pediatrics and Child Health