Intelligent Managed Services: TOGCs and intra-group supplies

The Upper Tribunal (UT) has decided that the transfer of a business to a company which makes supplies only within a VAT group is capable of being a transfer of a going concern (TOGC) and therefore outside the scope of the VAT charge.

This overturns the First Tier Tribunal's finding that there was no TOGC because the transferee's supplies to its fellow group members had to be disregarded.

Carrying on the same business as the transferor

Intelligent Managed Services Ltd (IMSL) transferred its banking support services business to Virgin Money Management Services Ltd (VMMSL), a member - but not the representative member - of the Virgin Money VAT group.

VMMSL also intended to carry on the business of supplying banking support services. However, unlike IMSL, it only made supplies to members of the Virgin Money VAT group. The group then made supplies of retail banking services to third party customers, which incorporated the banking support services supplied by VMMSL.

The FTT considered that VMMSL could not carry on the same kind of business as IMSL, as supplies made to fellow VAT group members must be disregarded. This view was supported by authority that only the representative member of a VAT group is treated as carrying on business on its own account. On this basis, VMMSL should be treated as not making any supplies at all which precluded the availability of TOGC treatment on the transfer.

Supplies to a VAT group member treated as made to the group

The UT, however, had the benefit of the recent Skandia decision on group supplies for VAT purposes. This confirmed that supplies made to a VAT group member are treated, for VAT purposes, as made to the group itself.

The UT also accepted IMSL's submission that where section 43(1) VATA 1994 provides that "any business carried on by a member of [a VAT] group shall be treated as carried on by the representative member", that is to be the case irrespective of whether the individual business makes supplies outside the group or not, and notwithstanding that supplies between members of a group are disregarded for VAT purposes under section 43(1)(a).

Furthermore, both parties accepted that, commercially, VMMSL intended to carry on the same kind of business as IMSL and that those services formed an integral part of the retail banking services provided by the group.

Against that background, the UT concluded that the transfer to VMMSL had to be capable of being a TOGC - the transfer should be regarded as being to the representative member under Skandia, and the representative member should be regarded as carrying on the same kind of business as IMSL by virtue of being deemed to carry on the business of VMMSL under section 43.

Less restrictive approach to TOGCs

This decision is significant, running contrary to what one might call long-established practice. We understand that HMRC has confirmed that it will not appeal, in which case the scope for claiming TOGC treatment on the transfer of business divisions in and out of a VAT group has been considerably increased.

This may result not only in cashflow benefits but also in real savings, particularly where the business transferred includes real estate or is itself a property letting business, because the consideration attributable to the real estate assets will not include VAT and the SDLT cost on the transfer will be reduced accordingly. HMRC's published policy on property letting businesses has always been that a TOGC is not possible where either: (i) the purchaser of a property rental business is a member of the same VAT group as the existing tenant; or (ii) a VAT group member sold a property currently being rented to another group member to a third party.

This decision may also mean that it is possible for purchasers to reclaim the SDLT paid on business transfers which have been charged to VAT on the basis that TOGC treatment, contrary to the decision above, is not available.

Please do not hesitate to contact us should you wish to discuss any of these issues further.

Intelligent Managed Services -v- HMRC

Please click on the links below for the other articles in the September 2015 tax newsletter:

• Changes to fund returns
• Larentia + Minerva: recovery of VAT by holding companies
• Improving large business tax compliance - a consultation document
• Massey: VAT planning and abuse
• Qualifying private placement withholding tax exemption