20462

Value Added Tax - whether a transfer of a restaurant qualified as a transfer as a going concern  -  Appeal Dismissed

LONDON TRIBUNAL CENTRE

	ABDURRAHMAN TEZGEL	           Appellant
(trading as MASTER CHEF)

-	and –

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

			Tribunal:	HOWARD M NOWLAN (Chairman)
					RUTH A WATTS DAVIES, MHCIMA, FCIPD			

Sitting in public in London on 24 October 2007

Shevki Mehmet of Harman & Co, accountants, for the Appellant

Sarabjit Singh, counsel, for the Respondents

© CROWN COPYRIGHT 2007

DECISION

Introduction

1.     This was an appeal by Abdurrahman Tezgel against the refusal of Her Majesty’s Revenue and Customs (“HMRC”) to accept his claim that the transfer of a restaurant business on 5 January 2005 qualified as a transfer as a going concern.     The claim was essentially disputed on the ground that the buyer of the business, a Mr. Kocak, never himself conducted a restaurant business from the relevant premises.    It was suggested that he lived above the premises and effectively licensed the restaurant to a third party, Mr. Karaarslan, who ran the business and made all the appropriate VAT returns in respect of it, whilst paying a VAT free amount (of between 15 and 20% of turnover) to Mr. Kocak.

2.     The Appellant variously argued that:-

•	the business was sold to Mr. Kocak who was registered for VAT, and that it was no concern of the seller how the buyer conducted the business;
•	that the right analysis was that Mr. Kocak was conducting the business personally and was simply engaging Mr. Karaarslan as a manager, in the sense of being an employed manager; and that
•	from 6 to 17 January 2005, the date when Mr. Karaaslan registered for VAT purposes, it was implicit that Mr. Kocak was trading in his personal capacity, and that if matters changed on 17 January, this did not affect the claim that the business was transferred as a going concern.

3.     We agreed with the contention on the part of HMRC and dismissed the various grounds of appeal advanced on behalf of the Appellant. 

The facts in more detail

4.      The Appellant had owned the freehold premises known as 11&15 Sycamore Road, Amersham, Bucks, from which he had conducted a restaurant business known as “Master Chef”.

5.       On 5 January 2005 the Appellant sold the business to Mr. Kocak, though it was accepted that in the lead-up to the sale, the Appellant had met both Mr. Kocak and Mr. Karaarslan.    

6.      The Sale Agreement was essentially in the form of a Real Property sale governed by the Standard Conditions of Sale (Fourth Edition).     The property sold was subdivided into four parts, being:-
1.	the freehold of 11 & 15 Sycamore Road;
2.	the seller’s interest in some store room at the back of the first property;
3.	the goodwill of the business, rather curiously described as that of a coffee shop and hot food takeaway, trading under the name “The Coffee Shop”;  and
4.	the seller’s fixtures and fittings.

Nothing appeared to turn on whether the business was trading under the name of “The Coffee Shop” or “Master Chef”, and that slight confusion of names was not explained to us. 

7.     When, after a considerable number of requests on the part of HMRC, the price paid for the business and the split of consideration between the above four items was revealed, it emerged that the consideration given for the four categories of property listed in paragraph 6 above was £235,000, £10,000, £30,000 and £40,000 respectively.      We commented that it seemed strange if the business was sold as a going concern that there was no transfer of any stock, and were told that at mid-night on 5 January, a stock-take was made and £200 was paid for stock.

8.     24 Special Conditions were included in the Sale Contract, and it is just worth quoting the somewhat strange terms of Special Condition 17.   This provided that:

“If VAT is payable (whether obligatory or optional) in respect of any payments due to be made under this Agreement then the Seller shall in addition to such payments pay VAT thereon at the rate applicable thereto.”

To put that Condition in context, the previous Condition had required the buyer to pay an additional amount of £150, to cover solicitors’ expenses, in addition to interest if the buyer was late in completing the purchase. 

9.      It was difficult to decide precisely how the business was run after its sale by the Appellant.      No-one gave evidence before us, and notwithstanding that Mr. Kocak also used Harman & Co, who represented the Appellant, as his accountants, and notwithstanding that there had been a very considerable amount of time in which to prepare for the hearing, no evidence was available from either Mr. Kocak or from Mr. Karaaslan.  

10.     The facts that emerged clearly from the various documents which we were shown were that:-

•	as already mentioned Mr. Kocak and Mr. Karaaslan had plainly met the Appellant before the sale of the business;
•	on 17 January 2005 Mr. Karaaslan submitted the forms to obtain VAT registration and indicated that he was trading from the premises at Sycamore Road, giving January 17 as his start date;
•	there was no written contract between Mr. Kocak and Mr Karaaslan governing the relationship between them but it was clear that Mr. Karasslan paid Mr. Kocak an amount stated to be in the region of 15 - 20% of the turnover of the restaurant.   This (as will be seen from letters that we will quote below) was sometimes referred to as a management charge, and it was, and was said to be, an amount paid “free of VAT”;   and
•	although HMRC officers at one time thought that Mr. Kocak was not registered for VAT at all, it later emerged that he was registered in respect of a restaurant that he ran in Uxbridge, and it was suggested by HMRC that the various returns made by Mr. Kocak never included anything in respect of the trading at the Amersham restaurant. 

11.     In response to repeated letters from HMRC officers, designed to establish the true relationship between Mr. Kocak and Mr. Karaaslan, the following letters were eventually sent in reply:-

•	Mr. Kocak wrote to H M Customs & Excise on 8 November 2005 saying:

“Please note that I have bought the business and ground floor of premises 15 Sycamore Road Amersham Bucks HP6 5EQ from A. Tezgel.

I purchased the business to run it myself;  I have not sold the business;  I simply let third parties to manage it for the time being.”

•	On 15 December 2005 Mr. Karaarslan wrote to HM Customs & Excise in reply to a clear letter that asked various highly relevant questions to determine the nature of the relationship between Mr. Kocak and Mr. Karaaslan, the reply being in the following terms:-

“I did not buy the business, I am managing the business.   The business is owned by Mr. Kocak.   I pay a management fee to Mr. Kocak.    I am not paying VAT on the management fee”.

12.     HMRC rejected the Appellant’s claim that his transfer of the business on 5 January qualified for VAT purposes as a transfer as a going concern, on the ground that  the terms of Article 5(1) of the Value Added Tax (Special Provisions) Order 1995 required inter alia that to so qualify, it had to be shown that “the assets [were] to be used by the transferee in carrying on the same kind of business, whether or not as part of any existing business, as that carried on by the transferor”, and in HMRC’s view that was not established.     Since Mr. Karaaslan had dealt with all the VAT returns as if the conduct of the business was in his hands, it was contended that Mr. Kocak was simply using the premises as an investment (or it emerged at the hearing both as an investment and as living accommodation), whereupon the 15 - 20% paid to Mr. Kocak by Mr. Karaaslan was effectively rent paid for a licence to occupy the premises and to trade from them. 

The contentions on the part of the Appellant

13.     Three quite distinct contentions were advanced on behalf of the Appellant at different times, namely that:- 

•	the Appellant thought that Mr. Kocak was buying the business as a going concern with a view to running it himself, and that it was of no concern to the Appellant to ascertain what the buyer was actually going to do with the business;
•	the nature of the arrangement between Mr. Kocak and Mr. Karaaslan was that Mr. Karaaslan was just a manager, and Mr. Kocak was thus conducting the business through a manager; and 
•	(the only contention actually advanced at the hearing, though not mentioned before the hearing and not mentioned in the Appellant’s formal grounds of appeal) that from 6 to 17 January 2005 the business was clearly open to customers in the normal way, and that since Mr. Karaaslan indicated in his initial VAT notices that he commenced business on 17 January, Mr. Kocak must have been conducting the business personally between the two dates, so that, if only for that short period to time,  he did conduct the business in the same manner as the transferor had done.

The contentions on the part of the Respondents

14.      The contentions on behalf of the Respondents were that the legal pre-conditions for a transfer as a going concern had not been fulfilled, essentially for the reason given when the claim was rejected, as mentioned in paragraph 12 above.    Counsel for the Respondents described the third of the contentions, somewhat aptly we consider, as a “chancer’s argument”, since the Appellant had only known of the slight discrepancy in dates between 6 and 17 January once the Appellant’s representative had seen the papers filed for the appeal on behalf of the Respondents. 

Our decision

15.     The Appellant’s first contention is simply wrong in law.    In order for a transfer to qualify as a transfer as a going concern it is manifestly not enough for the transferor to transfer the assets and then say that he need not concern himself with what the buyer subsequently does.   It is clearly the case that the buyer must in fact carry on the same kind of business as that conducted by the transferor.    In the light of this it is extremely common for business sale agreements to confirm the joint expectation of the parties that the transfer will qualify for the “transfer as a going concern” treatment for Value Added Tax purposes, and then common for the agreement to provide that if this treatment is denied, the purchaser will pay additional “price” equivalent to the VAT that the transferor unexpectedly has to pay, with the transferor naturally furnishing a VAT invoice to the purchaser, whereupon assuming that the transferee is conducting some type of taxable activity for VAT purposes with the acquired assets, the extra price paid will generally be matched by additional input deductions.   Accordingly, cash flow apart, no-one will be particularly disadvantaged.

16.     We accept that if “going concern” treatment is denied, and the purchaser is in fact conducting no business with the acquired assets, then naturally the common form of contractual undertakings mentioned in 15 above will be of no assistance because an undertaking on the part of the transferee to pay additional price will then just increase the price, and there would be no matching input deduction that would render that increase merely a matter of cash flow, or “timing” significance. 

17.     Whilst it has no particular bearing on the fact that we reject the Appellant’s first ground of appeal, we might say that we found the provision of Condition 17 attached to the Sale Contract to be somewhat curious.   The condition would have appeared more natural in the context in which it appeared if it had required the purchaser to pay the VAT (or rather had required the purchaser to pay additional purchase price to reflect the unexpected VAT charge), particularly as the context rather suggested that the person making the payment under this clause would be the person making the other payments referred to, and the purchaser was plainly he person making or potentially liable to make the other payments.    We repeat that this is not material to our decision, but we somewhat suspect that in a first version of the relevant Condition, the reference might have been to the purchaser being liable to “pay the VAT in addition to the other payments”, and it may be that the solicitor for the purchaser astutely modified the contract.     In the light of the fact that the purchaser would have obtained no input deduction for any additional price paid, along with the receipt of VAT invoices, such a change would have been very prudent. 

18.     Whatever the explanation of this curious drafting point, it has no bearing on the fact that the Appellant’s first contention is wrong for the reason given in paragraph 15 above. 

19.     The next question revolves around the relationship between Mr. Kocak and Mr. Karaaslan, and the issue of who was running the business, and who was properly liable for the VAT in respect of it.

20.     It is unfortunately the case that the reference to Mr. Karaaslan being a manager is a very ambiguous statement, as the reference to someone being a manager could quite aptly describe either of the two totally different legal relationships.      The first use of the term would apply to an “employed manager”, where the manager would be paid a salary or a salary plus commission, but the business and the basic business results would all be the direct concern of the trader employing the manager.   The trader would draw up the accounts, the payments to the manager would all be deductions, the trader would make and keep the net profits or losses and the trader, not his employee, would be the registered trader for VAT purposes. 

21.     The other quite different use of the term “manager” is the usage common in pubs where the manager pays a rent to the brewery company but himself trades “as a manager”.     In this sense the manager is not an employee of the brewery company but is the full trader, claiming a deduction of course for the rent paid to the brewery company.     

22.     In the present case, since the flow of payments was from Mr. Karaaslan to Mr. Kocak, this is very strongly indicative that the right analysis is that Mr. Karaaslan was a manager in the second sense mentioned in paragraph 21.   What he was paying was effectively rent for the informal licence to use the premises.   The only other conceivable analysis would be that the flow of payments from Mr. Karaaslan  was some form of “accounting for the results of the business to the trader, with a permissible deduction for 80% of turnover retained as salary”.    Since however Mr. Karaaslan plainly accepted that he was running the business for VAT purposes, and since he filed the relevant forms for registration within only 11 days of the transfer of the business by the Appellant, and since it is suggested by HMRC that Mr. Kocak’s VAT returns only covered other business activities (including presumably his restaurant in Uxbridge), but nothing in respect of the Amersham business, there has to be the strongest indication that Mr. Karaaslan was a manager in the second sense indicated in paragraph 21 above.  

23.     We concede that because Mr. Kocak was unavailable to give evidence, it was not actually established that he did not account for VAT in respect of the Amersham premises.      And we accept that even though he was running a restaurant in Uxbridge, it would have been perfectly possible for him to run another restaurant, or indeed any number of restaurants, presumably engaging employed managers in the sense indicated in paragraph 20 above.   However, there was no actual evidence that Mr. Kocak was conducting any business from the Amersham premises; it was said that he was living on the premises and deriving a flow of income that sounded like rent in respect of the restaurant part; Mr. Karaaslan was definitely acknowledging that he was conducting a full trade from the premises by dealing with the relevant VAT returns in his personal capacity, and since Mr. Kocak used the same firm of accountants as the Appellant and a very long period elapsed before this case came on for hearing, it is surprising that no relevant evidence was obtained from Mr. Kocak if indeed he was the beneficial owner of all the trading activity at the Amersham premises.   After all, had he been the trader in the relevant sense, it would appear that this revelation would have solved the Appellant’s whole problem , and would not have adversely affected Mr. Kocak either for the reason given in paragraph 15 above. 

24.     We conclude therefore that there is every indication that it was Mr. Karaaslan and not Mr. Kocak who was trading from the Amersham premises, and we therefore reject the Appellant’s second contention. 

25.      The final issue is whether the Appellant has established that whilst from 17 January 2005 Mr. Karaaslan was conducting the restaurant trade personally, nevertheless the restaurant was open from 6 until 17 January and during this period Mr. Kocak must have been operating the restaurant personally, and the arrangements must have changed on 17 January.      In reciting the contention that “Mr. Kocak must have been operating the restaurant personally, we should clarify that all that was meant was that we should infer that the arrangements changed on 17 January.     No evidence was produced at all as to what had actually happened between 6 and 17 January, or as to whether anything had indeed changed on January 17.    Furthermore no comment was made either on the point that Mr. Karaaslan had actually filed his form for VAT registration extremely quickly even on the assumption that he commenced trade on 6 January, so that everything hinges on the simple suggestion that because Mr. Karaaslan said in that form that trading commenced on 17 January and not 6 January, we should infer from this the most extraordinary change in method of operation. 

26.     We reject this third contention on behalf of the Appellant as being without any foundation.     It seems infinitely more likely to us that Mr. Karaaslan made a slight error in indicating the date when his trading commenced.   He might have been referring to the end of the first week’s trading, or he might simply have assumed that he needed to insert the date on which he despatched the form as the date of the commencement of his trading.    In the absence of evidence from anyone however that the extraordinary chain of events happened in the far fetched manner suggested, and in the light of the fact that Mr. Kocak and Mr. Karaaslan had both visited the restaurant prior to the transfer by the Appellant, so that one might assume that they would have been quite clear about the arrangement that was to subsist between them, and that certainly subsisted after January 17, we reject this third contention.   As counsel for the Respondents said, it was a chancer’s argument, dreamt up only when the Appellant’s representative saw the Respondents’ case.   In the light of the fact that the Appellant’s representative was also the accountant to Mr. Kocak, it seems reasonable for us to say that were there any foundation to this third argument, the relevant accountants might have had a clearer idea of the facts to sustain it, and might also have sought to present some evidence that would give the argument at least some credibility. 

27.     We should mention finally that HMRC had indicated that they had treated the sale of the freehold and the sale of the storeroom areas by the Appellant as being exempt from VAT, and had treated the only taxable supplies as the sale of the goodwill and the fixtures and fittings.   The officers had then allocated input deductions for purchases of kitchen equipment that appeared by them to relate to the fixtures and fittings to those items, thus giving a deduction for the relevant input tax, and they had apportioned the balance of the input deduction by reference to the ratio of taxable to exempt supplies.    They had repeatedly asked the Appellant to comment on the relevant treatment and allocation, in the absence of the Appellant having provided any figures himself, and we understood  that  no comments had been received until one received immediately before the hearing before us.   And we were told that HMRC officers had not had time to consider the comments then made.    Our only comment on this is to say that this aspect of allocation of input deductions was not the subject matter of the present appeal, and it remains either for the Appellant and HMRC to agree on the correct allocation, or for there to be a further appeal. 

HOWARD M NOWLAN
CHAIRMAN

RELEASED: 19 November 2007

LON 2006/1081