General Distribution and Storage Ltd v Revenue & Customs (VAT - transfer of a leasehold property to purchaser

Factual and Procedural Background

The Appellant, Company A, was the freeholder of a property leased for fifteen years to a tenant operating a franchise business. Company A sold the property to Company B, with completion occurring on the same date as Company B's onward sale of the property to Company C. Company A received payment including VAT but did not remit the VAT to the tax authority. Upon discovering this, the tax authority issued an assessment for the VAT amount. Company A appealed the assessment on the basis that the transaction qualified as a Transfer of a Going Concern (TOGC), which would exempt the VAT liability. The appeal was heard by the First-tier Tribunal, which considered evidence including contracts, VAT registration documents, witness statements, and correspondence. The Tribunal ultimately refused the appeal and upheld the VAT assessment.

Legal Issues Presented

1. Whether the sale of the leasehold property qualified as a Transfer of a Going Concern under VAT law.
2. Whether the transferee intended to operate the business transferred or simply to liquidate it.
3. Whether the transferee's business before the transfer needed to be the same as the transferor's business for TOGC provisions to apply.

Arguments of the Parties

Appellant's Arguments

• The sole issue was whether Company A and Company B were carrying on the same type of business, namely property investment.
• The Appellant argued that the TOGC provisions applied because the transfer involved a going concern.
• It was contended that distinguishing between holding property for rental and quick resale was an arbitrary distinction violating principles of fiscal neutrality.
• The Appellant referred to principles summarized in a relevant Upper Tribunal case, emphasizing avoidance of arbitrary distinctions.

Respondent's Arguments

• The Respondent submitted that Company B’s business was scaffolding, as indicated by its VAT registration, and there was no evidence it was engaged in property investment.
• The back-to-back sale indicated no intention by Company B to carry on the business of letting the property.
• The Respondent argued that the TOGC requirements were not met because the transferee did not intend to continue the economic activity carried on by the transferor.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Zita Modes Sarl v Administration de l'enregistrement et des domaines [2005] STC 1059	Interpretation of Article 19 of the Principal VAT Directive regarding the TOGC provisions and the requirement that the transferee intends to operate the business transferred.	The court applied Zita to confirm that the TOGC provisions require the transferee to intend to carry on the business and not simply liquidate it, and that the transferee's prior business need not be the same as the transferor's.
Intelligent Managed Services Ltd v HMRC [2016] UKUT 341 (TC)	Clarification of the principles from Zita, including the need for an overall assessment of the transaction and the intention of the transferee.	The court relied on IMS to emphasize that the transferee must intend to continue the independent economic activity and that arbitrary distinctions should be avoided, applying these principles to the facts.

Court's Reasoning and Analysis

The court analysed the transaction under the framework established by the Principal VAT Directive and the UK Value Added Tax (Special Provisions) Order 1995, considering the conditions for TOGC. It acknowledged that the property was capable of carrying on an independent economic activity and that the transferee's prior business need not be identical to the transferor's. However, the critical factor was whether the transferee intended to operate the business transferred.

Evidence showed that Company B had exchanged contracts to sell the property onward before completion of its purchase, indicating no intention to continue the letting business. The Tribunal declined to find that Company B was engaged in property investment, citing insufficient evidence. The back-to-back sale negated the possibility of business continuation required for TOGC. Consequently, the transaction was characterised as a mere transfer of assets rather than a transfer of a going concern.

Holding and Implications

The Tribunal DISMISSED the appeal and upheld the VAT assessment against Company A.

This decision directly affects the parties by confirming the VAT liability on the transaction. No new legal precedent was established beyond the application of existing principles from the Principal VAT Directive and relevant case law. The ruling clarifies that back-to-back sales without intention to continue the business do not satisfy the TOGC provisions for VAT purposes.