TRANSFER AS A GOING CONCERN — Flooring business running 3 shops closed down — Directors of limited company started new business from one unit — compulsorily registered as a transfer of a going concern by Commissioners — new business not a transfer as a going concern — appeal allowed
            MANCHESTER TRIBUNAL CENTRE

RICHARD OWEN & DARREN FREEMAN
                                             T/A WORCESTER FLOORING	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	MR D S PORTER	  (Chairman)
MR M FAROOQ 	  (Member)					 	

Sitting in public in Manchester on 20 February 2004

Mr R Owen and D Freeman for the Appellant

Mrs P Ramshaw of counsel instructed by the Solicitor for the Customs and Excise for the Respondents

© CROWN COPYRIGHT 2004

DECISION

The Dispute

1.	By a Notice of Appeal dated the 5 August 2003 Mr Owen and Mr Freeman (“the Appellants”) appealed against the compulsory registration on 21 April 2001 of the business by the Respondents who had treated the transfer of the business as a transfer of a going concern pursuant to paragraph 7(2) of Schedule 1 of the Value Added Tax Act 1994 (“ the Act”). The registration gave rise to a consequential assessment to VAT of £2140 plus interest. The Appellants insist that they had started a new business.  The Respondents are satisfied that the business is the continuation of the former business run by Kingswood Flooring Limited

The Parties
2.	Mrs P Ramshaw of Counsel appeared for the Respondents and called Mr J R Willis, S J Bourne and Miss H D Cox as witnesses, and produced a bundle of copy documents.  The Appellants appeared in person.

The Facts
3.	Kingswood Flooring Limited, which was registered for VAT, operated from its principal premises at 1 Tannery Mews, City Walls Road, Worcester WR1 2AT.  The premises were rented for approximately £5,000 a year. The company fitted hardwood laminated flooring, which it bought from flooring suppliers.  The business expanded and a cash and carry operation was set up at Bromsgrove. A rent of approximately £12,000 was paid to an independent Landlord in relation to these premises.  The cash and carry business handled cheaper flooring and acted as a warehouse for the principal business.  A further shop of approximately 1000 sq feet was opened at Stourbridge. A rent of £10,300 was paid to an independent Landlord in relation to those premises.  At its peak the business employed the Appellants, 3 people in the showroom and 2/3 fitters.

4.	Kingswood Flooring Limited got into financial difficulties and the Appellants put some £36,000 of their own money into the business in the hope that the business would improve. £28,000 of that money had been borrowed by the Company from HSBC and the Appellants had given personal guarantees on the loan. The business became financially unviable and the Appellants decided to liquidate it. They did not take legal advice, but decided to pay £28,000 to the Bank to clear the Companies indebtedness. They approached all their suppliers, explained what had transpired, and the suppliers chose not to pursue their debts.  Similarly the Landlords agreed that the showroom and shop leases could be assigned and did not pursue the Company for any rent arrears.

5.	The Appellants paid back all the customers where deposits had been taken for floors to be laid.  One of their customers complained to the Local newspaper that she had been badly let down and an article subsequently appeared confirming that the Appellants had refused to accept her as customer.  The Company was struck off the register at Companies House.

6.	The Appellants negotiated with all the previous suppliers who, to their surprise, continued o supply them in spite of the fact that they had owed them money from Kingswood Flooring Limited. The suppliers, however, insisted on cash transactions.

7.	The new business operated from 1, Tannery Mews and the rental was paid on a weekly base, in cash.  It originally dealt with the laying of laminated flooring and has since expanded into stone flooring.  Mr Owen has left the business due to ill health, brought on by the stress caused by the experiences in the previous business, and Mr freeman is now running the new business with his wife and is just making a living out of it. 

8.	There was no goodwill in the original business as that was closed down and any assets that there had been in the original business (principally shelving given to that business by the suppliers of the laminated flooring so that their flooring could be displayed) were of little or no value.

9.	Mr Owen registered the new Business on 18 October 2001, and he requested that registration should take effect from 22 October 2001. The Respondents registered the new business from 21 April 2001, cancelled the earlier registration and notified the Appellants accordingly by letter on 1st February 2002.

10.	Mr Bourne, who had attended at the premises, was unsure whether the business should be treated as the result of a transfer as a going concern, but indicated that he would advice the Appellants in due course, which he did on 3 March 2003

11.	Mr Willis examined the sales and purchases records of the new business from 01/05/01 to 22/10/01 and established an output tax of £6913 and an input tax of £4773.  This resulted in a net under-declaration of £2140.  Miss Cox, who is employed as an appeals and reconsideration officer, supported the findings of Mr Willis in her letter of 24 July 2003 (see her witness statement in the bundle)

12.	We find as fact the matters set out in paragraphs 3 to 11 above.
The Law
13.	(i) 	Section 49(1) of the Value Added Tax Act 1994 (“the Act”) provides that where a business carried on by a taxable person is transferred as a going concern to another person that person shall be treated as having carried on the business before as well as after the transfer. Where that other person is not registered for the purposes of the Act, then he becomes liable to register, if the value of his taxable supplies in the period of one year ending at the time of the transfer has exceeded £55,000, or there are reasonable grounds for believing that in the period of 30 days beginning at the time of the transfer that they will exceed £55,000
(ii)	Paragraph 7 of Schedule 1 of the Act provides that the Commissioners shall register any such person (whether or not he has notified them) with effect from the time that the business was transferred.

Summing Up
14.	Mrs Ramshaw first apologised for the confusion that there had been about the VAT registrations and for the fact that the Appellants had not been given a speedier response. She submitted that the Appellants had taken over the original business of Kingswood Flooring Limited.  They were operating from the same premise; using the same suppliers; and effectively took advantage of the goodwill, because of the familiarity that customers would have with the old company.  When the Bank loan was paid off, the Appellants had not, as they believed, acquired the assets of Kingswood Flooring Limited. No payment had been made for them and the Appellants merely continued to use the assets as before.  The turnover of the business was £94,278 to the end of March 2001 and the Appellants had been liable to be registered for VAT The assessment was therefore to best judgement.

15.	Mr Owen submitted that they had closed down the business and started a much-reduced business. He was unhappy about the time that had been taken to establish the position.  If they had been advised earlier that the business should have been registered from 21 April 2001 they would have been able to charge VAT to their customers and thereby recovered the £2140 now being charged.

16.	We have considered the facts in this appeal and are satisfied that the Appellants have started a new business and that the circumstances of the transfer do not give rise to a Transfer of a going concern.  The Appellants have made an honest attempt to close down the original business.  We therefore confirm that the new business is to be registered from the 22 October 2001 and that as a result the assessment is not to best judgement.

17.	It is abundantly clear from the evidence that Kingswood Flooring Limited was closed down.  It had been a more substantial business operating form three sites with 5 staff.  The Appellants acted honourably.  They had paid off the debt due to the Bank; advised their suppliers that they were closing down and that they could not pay them; returned all the deposits for the existing work to their customers; and advised them that they were unable to take their jobs into the new business. In fact the local newspaper had run an article on the closure of the business, which must have meant that any goodwill that there had been in Kingswood Flooring Limited would have been lost. The Appellants started the new business because it was the only trade of which they had experience.

18.	We therefore allow the appeal and award costs to the Appellants of £200.

D S PORTER
CHAIRMAN
Release Date:

MAN/02/8098