The UK has several measures under its capital gains tax regime that can provide relief in situations of insolvency where a business fails. This case looked at the relief available under section 253 TCGA 1992 which with scenarios where an individual has made a loan to a trader and that loan has become irrecoverable. This case concerned a husband and wife who leant a substantial sum to a company.

The case is an excellent example of why keeping contemporaneous records of transactions is vital, even between husband and wife.

Background

Intelligent Management Services Ltd (“IMSL”) operates a banking support services trade. In August 2010, (having sought customers for its platform with limited success) IMSL transferred this business to Virgin Money Management Services Limited (“VMMSL”), which was a member of the Virgin Money VAT group.

At the time of the transfer to VMMSL, the deed of transfer described IMSL’s business as that of “owning, maintaining, operating, using, developing and supporting an information technology infrastructure and know-how for supply to and use by others in the provision of banking processing services in the United Kingdom”. The assets subject to the transfer included goodwill, equipment and intellectual property rights.

Following the business transfer, VMMSL provided banking processing services to another member of the Virgin Money VAT group, Virgin Money Bank Limited (“VMBL”) which provided retail banking services to retail customers.

The processing services that VMMSL provided to VMBL were incorporated into the retail banking services offered by VMBL. VMMSL did not provide any services to any other parties outside of the VAT group companies. However VMBL offered payment processing services for which the capability provided by the banking engine was a crucial component.

The issue to be determined in this case was whether TOGC can apply in a situation where a business is transferred where the transferee only makes supplies from the business to another member of the VAT group.

It was accepted by all parties that if VMMSL was a stand-alone company, the conditions to be treated as a TOGC would have been satisfied, including the condition that VMMSL continue to carry on the same kind of business as IMSL.

The FTT in its decision had stated that the sale of a business to an entity which only carries on that business by making supplies within the VAT group cannot qualify as a TOGC as those supplies are disregarded for VAT purposes. Therefore the same business is not carried and the conditions for relief under TOGC are not met.

The Upper Tribunal considered whether the requirement in the TOGC rules for the “same kind of business” to be carried on by the transferee following the transfer was contrary to EU law as that particular phrase does not appear in the EU VAT directives. The Tribunal considered that this test must not be applied in an over restrictive manner and cannot give rise to a restriction that goes beyond the limits of EU law.

The Upper Tribunal considered EU law in the area focusing mainly on the Zita Modes case as well as the Winterthur Swiss Insurance Company case.

The following principles on TOGC rules emanating from EU law were considered relevant for this case:

1. The assets transferred must together constitute an undertaking capable of carrying on an independent economic activity and must not be a mere transfer of assets
2. All of the facts of the case must be looked at including the intention of the transferee
3. The transferee must intend to operate the business and not liquidate the activity immediately
4. The nature of the transaction must allow the transferee to continue the independent economic activity that was carried on by the transferor

The question that needed to be addressed what whether the fiction created by the VAT group of a single taxable person meant that the VAT group was to be treated as not carrying on the same business as the transferor.

Decision

The Upper Tribunal made the point that the activities of VMMSL contributed directly to the economic activity of the entire Virgin Money VAT group. It stated that it would be incorrect to identify the nature of the group’s activity by reference to its external supplies only.

While the Virgin Money VAT group is treated as a single taxable person for VAT purposes, this fiction does not change the nature of the group’s businesses. The Court stated that the group could still be considered as carrying on distinct separate businesses and this analysis was not affected by the fact that VMMSL’s supplies within the group were to be disregarded for VAT purposes. The activities of VMMSL and transactions within the group should not to be disregarded in this instance.

Accordingly, the Upper Tribunal considered that the activities and intentions of VMMSL must be considered when determining whether the group as a whole intended to use the assets transferred. In principle, it found that there was nothing in the VAT group rules that would prevent such a transfer, amounting to a TOGC. The court found that VMMSL continued the trade that had previously been undertaken by IMSL. As VMMSL was in the Virgin Money VAT group, this had the effect that the group, being a single taxable person for VAT purposes, was treated as the transferee and was treated as carrying on each of the businesses of the group members. The VAT grouping rules could not alter the fact that the group, in combination with other businesses, did continue to use the assets transferred in the same kind of business as carried on by IMSL. Therefore TOGC relief was allowed.

To conclude, this case appears to alter HMRC policy in this area and it would now appear that a holistic assessment of the facts should be undertaken when assessing whether TOGC applies.

The full judgment in this case is available from http://www.tribunals.gov.uk/financeandtax/Documents/decisions/Intelligent-Managed-Services-v-HMRC.pdf