VAT exemption for business transfer denied as transaction was merely asset sale without goodwill transfer.

THE SUPREME COURT

No. 95/03

Keane C.J.

Hardiman J.

Fennelly J.

BETWEEN

S. O’CÚLACHÁIN, Inspector of Taxes

Appellant

and

STYLO BARRATT SHOES LIMITED

Respondent

JUDGMENT delivered on the 31st day of March, 2004 by FENNELLY J.

This appeal concerns the application of an exemption from VAT in the case of the transfer of a business. It comes to this Court by

way of appeal from a High Court decision on a Case Stated from an Appeal Commissioner.

VAT was introduced by the Value-Added Tax Act, 1972 in order to give effect to the mandatory provisions of European directives.

Though it has since been much amended, the basic provisions of the VAT code are found, to give it its full title, in the Sixth Council

Directive 77/388/EEC of 17 May 1977 on the harmonization of the laws of the Member States relating to turnover taxes - Common

system of value added tax: uniform basis of assessment. The Directive requires Member States to subject to VAT all supplies of goods

and services, and makes a number of special provisions, in particular, exempting the supply of certain goods and services.

One of these is Article 5(8) of the Sixth Directive, which provides:

“In the event of a transfer, whether for consideration or not or as a contribution to a company, of a totality of assets or part

thereof, Member States may consider that no supply of goods has taken place and in that event the recipient shall be treated

as the successor to the transferor. Where appropriate, Member States may take the necessary measures to prevent

distortion of competition in cases where the recipient is not wholly liable to tax”.

Ireland exercised the option to provide that, in the cases covered by the article, no supply takes place. Section 3(5) of the Act of

1972 provides in relevant part as follows:

“(a) The transfer of ownership of goods pursuant to a contract of the kind referred to in subsection (1) (b) shall be deemed,

for the purposes of this Act, not to be a delivery of the goods.

(b) The transfer of ownership of goods—

(i) [not relevant]

(ii) [not relevant], or

(iii) in connection with the transfer of a business or part thereof to another accountable person, shall be deemed, for

the purposes of this Act, not to be a delivery of the goods … … [remainder not relevant]”.

The transaction at issue in the present case was effected pursuant to a contract in writing dated 9th February 1994 whereby W.J.

McManus & Son Limited, a Northern Ireland company, and W.J. McManus & Son (Dublin) Limited, a company incorporated in the State,

(collectively called “the vendors”) agreed to sell to Stylo Barratt Shoes Limited, an English company, (hereinafter “the taxpayer”) a

number of shoe shops some of them in Northern Ireland. The tax issue which arises concerns the chargeability to value added tax

(VAT) of the sale insofar as it concerned some nine shops in this jurisdiction.

The total consideration in respect of these premises was £1 million sterling, which was apportioned as follows:

“Premises (freehold and leasehold) £714,583.00 + VAT of £40,104.16

Fixtures and Fittings £192,708.00 + VAT of £40,468.75

Total: £907,291.00 £80,572.91”

The taxpayer, having paid the above sums to the vendor, would normally have been entitled, as a taxable person, to deduct the VAT

as an input credit. In its March/April 1994, VAT return it claimed credit in the amount of £80,572, which resulted in a repayment claim

of £62,687, because the claimed credit exceeded the amount of VAT invoiced in the period. The Inspector of Taxes disallowed the

deduction in its entirety and instead assessed the taxpayer for VAT in the sum of £17,885.92 based on its return. The taxpayer

appealed to the Appeal Commissioner. At an appeal hearing on 17th May 1996, the Appeal Commissioner heard evidence from a

Finance Director and an Area Manager for Ireland of the taxpayer company.

He posited the question for his decision as being whether the transaction, consisting of a sale under the agreement of 9th February

1994, was one upon which VAT was chargeable or whether it was a transaction falling under the statutory provision cited above and,

therefore, not a supply of goods.

The Appeal Commissioner decided that the proper test to be applied was whether there was an agreement for the transfer of a

business or part thereof. He also said that, if the answer to that question was “yes”, a further question would arise, namely whether

the ownership of goods changed in connection with the transfer of a business or part thereof. He held that the answer to the first

question was “no.” He decided, consequently, that there was no need to deal with the second question.

Immediately after this determination, the Inspector of Taxes expressed dissatisfaction and duly required a Case Stated for the opinion

of the High Court within twenty one days. The Appeal Commissioner duly signed the Case Stated on 25th January 2002 pursuant to

the provisions of section 428 of the Income Tax Act, 1967, as applied to VAT by section 25(2) of the Value-Added Tax Act, 1972. No

explanation has been provided for the delay of more than five years between the decision of the Appeal Commissioner and the signing

of the Case Stated.

The agreement is appended to the Case Stated and constitutes the principal evidence of the transaction. In addition, the Appeal

Commissioner made the following relevant findings:

The taxpayer is a wholly owned subsidiary of Stylo plc, with some 250 retail outlets mainly in UK high streets and 300

concessions in the Dorothy Perkins chain of shops;

There was no transfer of stock, book debts, creditors or goodwill;

The vendor continued to trade until 9th February 1994, the date of the agreement;

At the time when ownership of the premises and fixtures and fittings passed: the vendors had removed all its stock; the shops

had been closed for retail trade and did not open for approximately ten days; the staff to be engaged by the taxpayer spent

three days of this period being trained;

The taxpayer has 16 shops in the Republic of Ireland, 9 of them the subject of the present purchase; prior to the purchase, no

“due diligence” review of the accounts or business records was commissioned, nor was contact made with the vendors bankers;

Forty one members of staff employed by the vendors were subsequently engaged by the taxpayer but at different rates of pay

and different terms of employment; job offers were not made to staff until after the date of the agreement;

The taxpayer could have commenced a business similar to the vendors’ business but this was not the subject matter of the

contract and the taxpayer did not attempt to do so; the business of the taxpayer was directed to a different segment of the

market from that of the vendors;

The staff were retrained over a period of three days; the taxpayer did not commence trading until approximately ten days after

it acquired the premises, at which time the staff had been retrained;

By virtue of Clause 24 of the agreement, the vendors agreed not to compete with or allow their name or any business or trade

names used by them to be used by any business comprising the retail or wholesale of footwear or sportswear in the Republic of

Ireland for a period of twelve months from the date of the agreement.

The Appeal Commissioner summarised the arguments of the Inspector and of the taxpayer and set out his decision as follows:

“I, the Appeal Commissioner who heard the appeal, gave my decision in the following terms:-

I found that, on the basis of the oral evidence and legal documentation, the transaction under the Agreement of the 9th

February, 1994, involved the transfer of premises and fixtures and fittings and no more than that.

There was no attempt by the Company to discover the financial position of McManus or to obtain the business assets or

liabilities of McManus (i.e. stock, goodwill, contracts with supplies and others, and relations with bankers were not of

interest to the Company).

I am not in agreement with the arguments of the Appellant that the circumstances surrounding the recruitment of

certain of the McManus staff amounted to the effective take-over by the Company of the goodwill of McManus or that

the inclusion of a “non-competition” clause in the Agreement of 9th February, 1994, indicated that there had been a

transfer of the business or part thereof.

The Company could have commenced a similar business to that carried on by McManus but this was not the subject of

the contract and the Company did not attempt to do so. The business of the Company was directed to a different

segment of the market than that of McManus.

I did not accept that assertion that the correct test to be applied was whether the assets which were being transferred

formed part of an undertaking which was active and operating at the time of transfer. Section (3)(5)(b)(iii) of the VAT

Act 1972 is concerned with “… the transfer of ownership of goods … in connection with the transfer of a business or

part thereof …”. I believe this means that the proper test to be applied to is to ask, first, was there an agreement for

the transfer of a business or part thereof? If the answer to this is yes then a further question arises: did the ownership

of goods change in connection with the transfer of the business or part thereof? Since I have concluded that the answer

to the first part of the test is no, I am of the view that I do not need to deal with the second element of the above

test”.

The matter came before Kearns J in the high Court.

It should be said immediately that it was common case before the High Court that the test which the Appeal Commissioner applied

was not the correct one. The Inspector had relied particularly on an English decision: Customs & Excise Commissioners v Dearwood

Ltd. [1986] STC 327, where it had been held that the correct test of whether a business was transferred as a going concern was

whether it “could” be, not whether it “would” be carried on without interruption after the transfer and that the intention of the

taxpayer company was irrelevant. However, as was pointed out by Kearns J in the High Court, the relevant legislation in the United

Kingdom was worded differently. It expressly envisaged the transfer of a business as “a going concern” and that the transferee be

“carrying on the same kind of business...” In addition, McCracken J, in the High Court, in B.D. O’Shea, Inspector of Taxes v Colle

Parkview Service Station Ltd (Unreported 25th May 2000) held that “the subsection does not require any formal contract for the

transfer of the business, and that it is sufficient to satisfy the subsection if the circumstances are such that the benefit of the

business is in fact transferred.” The Appeal Commissioner, both in the case which came before McCracken J and in the present one

had posed the different question of whether there was an agreement for the transfer of the business.

To a very large extent, all of these decisions are now irrelevant. Article 5(8) of the Sixth Directive has been definitively interpreted,

since the High Court decision, by the Court of Justice in Case C-497/01 Zita Modes Sarl v Administrationde l’enregistrement et des

domaines (judgment of 27th November 2003). It might be observed, before considering and applying the most directly relevant terms

of the judgment, that the Court, at paragraph 32, repeated that, “like all the exemptions provided for in Article 13 of the Directive,

the no-supply rule laid down in Article 5(8) constitutes an independent concept of Community law whose purpose is to prevent

divergences in the application of the VAT system from one Member State to another.” In the light of this need for uniform

interpretation of generally applicable provisions of Community law, it must be doubted whether the English case-law should be

distinguished by reference to the different wording of the national-law exempting provision. In fact, the interpretation adopted by

McCowan J in the Dearwood case and by McCracken J in that of Colle Parkview Service Station, do not appear to be markedly

different. In any event, both have now been overtaken by the Zita Modes decision.

The principal proposition which emerges from the judgment in Zita Modes is that Article 5(8) is essentially concerned with the transfer

of businesses or undertakings and not mere physical assets. This appears, firstly, from paragraphs 39 and 40 of the judgment where

the meaning of the Article is explained by reference to its purpose:

“39. The context of Article 5(8) and the purpose of the Sixth Directive, as set out in paragraphs 36 to 38 of this judgment,

make it clear that that provision is intended to enable the Member States to facilitate transfers of undertakings or parts of

undertakings by simplifying them and preventing overburdening the resources of the transferee with a disproportionate charge

to tax which would in any event ultimately be recovered by deduction of the input VAT paid.

40. Having regard to this purpose, the concept of a transfer, whether for consideration or not or as a contribution to a

company, of a totality of assets or part thereof must be interpreted as meaning that it covers the transfer of a business or

an independent part of an undertaking including tangible elements and, as the case may be, intangible elements which,

together, constitute an undertaking or a part of an undertaking capable of carrying on an independent economic activity, but

that it does not cover the simple transfer of assets, such as the sale of a stock of products”.

Later, at paragraph 44, the Court reiterates its fundamental ruling regarding the nature of a transfer of assets, while adding a

requirement that the transferee must intend to operate the business being transferred:

“However, it is apparent from the purpose of Article 5(8) of the Sixth Directive and from the interpretation of the concept of a

transfer, whether for consideration or not or as a contribution to a company, of a totality of assets or part thereof which

flows from it, as set out in paragraph 40 of this judgment, that the transfers referred to in that provision are those in which

the transferee intends to operate the business or the part of the undertaking transferred and not simply to immediately

liquidate the activity concerned and sell the stock, if any.”

I have set out these parts of the judgment of the Court of Justice, in advance of the submissions on the appeal, in order to make it

easier to understand the preliminary submission made by counsel for the Inspector. He submitted that, in the light of the decision of

the Court of Justice, which was not available at the time either of the hearing before the Appeal Commissioner or that before the High

Court, it was appropriate to refer the Case Stated back to the Appeal Commissioner to enable him to amend it by including findings of

fact relevant to the terms of the Zita Modes judgment. The relevance of the intention of the transferee had not been foreseen and

the Case Stated contains no findings of fact on that subject. Counsel for the taxpayer submitted that the Court was in a position to

deal with the matter on the basis of the existing findings and also that there had now elapsed a very long interval of time since the

original hearing. The possibility of a reference back had been raised, though in a different context, before the High Court and both

parties had urged the judge to continue with the hearing on the basis of the existing facts. The Court decided to continue with the

hearing of the appeal but to consider this preliminary point raised by the Inspector as one of the issues when giving its decision.

Counsel for the Inspector concentrated his attention on the decision of the Appeal Commissioner that the agreement of 9th February

1994 “involved the transfer of premises, fixtures and fittings and no more than that.” He submitted that this ruling was perverse and

was one which no reasonable commissioner could reasonably make. He said that the Commissioner was not entitled to rely on oral

evidence to contradict the written terms of the agreement. He acknowledged that Clause 27 of the agreement provided that: “for the

avoidance of doubt it is hereby agreed by and between the parties that the transaction hereby effected is not nor is it to be

construed as the purchase or a transfer of a business undertaking.” Such provisions are, however, accorded very slight weight as

against the substantive provisions of an agreement. He said that a number of provisions demonstrated that the sale involved the

transfer of employees of the vendors’ business and the sale of the goodwill of the former business.

He drew attention, firstly, to some references to employees of the vendors. One provision states that the agreement relates to “the

Leasehold and Freehold Premises in the Republic of Ireland (and the staff employed thereat)…” The taxpayer also agrees “to employ

those staff set out in Schedule X.” It also “retains the right for seven days…to decide whether to employ …” certain named

employees. The taxpayer did in fact employ 41 former employs of the vendor, as set out in the Case Stated.

Clause 24 provided that the vendors, subject to a number of exceptions, should not “either on their own account or in conjunction

with others whether directly or indirectly be engaged, concerned … … or interested in, or allow their names, or any of them to be

used by any business comprising the retail or wholesale sale of footwear or sportswear in the Republic of Ireland for a period of 12

months from the date hereof.” Counsel submitted that this clause, principally, but also a brief reference to the use of the vendors’

name on the premises for a maximum of five days demonstrated that the transaction involved the sale of goodwill. The fact that no

consideration was assigned to the goodwill was irrelevant, since the subsection does not require that there be any consideration for a

transaction caught by its provisions.

Counsel for the taxpayer supported the decision of the Appeal Commissioner. There was no provision for the sale of goodwill. The

employees were not transferred, but re-employed independently by the taxpayer company. The Appeal Commissioner rightly drew

attention to the absence of any “due diligence” examination, which tended to confirm that no aspect of the former business was

being transferred. He contended that the findings of fact made by the Appeal Commissioners are not open to reversal on the well-

established grounds stated in Mara (Inspector of Taxes) v Hummingbird Ltd [1982] I.L.R.M. 421 and subsequent cases.

Conclusion

The status of findings of fact of the Appeal Commissioners has been most recently considered by this Court in D. A. MacCarthaigh,

Inspector of Taxes v Cablelink Ltd and others (Unreported 19th December 2003.) In my judgment in that case, with which the other

members of the Court agreed, I found it convenient to summarise the principles by reference to the judgment of Blayney J in Ó

Cúlacháin v. McMullan Brothers Ltd. [1995] I.R. 217. There he said:

“1. Findings of primary fact by the judge should not be disturbed unless there is no evidence to support them.

2. Inferences from primary facts are mixed questions of fact and law.

3. If the judge's conclusions show that he has adopted a wrong view of the law, they should be set aside.

4. If his conclusions are not based on a mistaken view of the law, they should not be set aside unless the inferences which he

drew were ones which no reasonable judge could draw.

5. Some evidence will point to one conclusion, other evidence to the opposite: these are essentially matters of degree and the

judge's conclusions should not be disturbed (even if the court does not agree with them, for we are not retrying the case)

unless they are such that a reasonable judge could not have arrived at them or they are based on a mistaken view of the

law”.

It is relevant also to recall the statement of Kenny J in the Hummingbird case that, insofar as the conclusions of the Appeal

Commissioner “are based on the interpretation of documents, the court should reverse them if they are incorrect for it is in as good

a position to determine the meaning of documents as is the commissioner.”

In the present case, the Appeal Commissioner heard oral evidence from two executives of the taxpayer company. They were part of

the material which led him to make his decision. In reality, however, counsel for the Inspector relies almost entirely on the

interpretation of the written agreement. If the Court were to accept that the Appeal Commissioner had misinterpreted that

agreement, it would probably be open to it to reverse his decision, without departing from the principles laid down in the two cases

referred to.

The essential legal question is whether the transaction effected by the agreement involved, to use the words of the subsection, “the

transfer of a business or part thereof.” Since that statutory provision is an implementation of an option permitted to the Member

States by a provision of Community law, it must be interpreted in the light of the provision permitting it, namely Article 5(8) of the

Sixth VAT Directive, which speaks of the transfer of “the totality of assets or part thereof.”

That provision, in turn, has been authoritatively interpreted by the Court of Justice in the Zita Modes case. The court has ruled

unambiguously that the provision “covers the transfer of a business or an independent part of an undertaking including tangible

elements and, as the case may be, intangible elements which, together, constitute an undertaking or a part of an undertaking

capable of carrying on an independent economic activity, but that it does not cover the simple transfer of assets, such as the sale

of a stock of products.” It has also held that there is a second element to the test, namely that “the transferee intends to operate

the business or the part of the undertaking transferred…”

The Court of Justice was, of course, merely giving a preliminary ruling on the interpretation of Article 5(8) and it remained for the

national court to apply the ruling and to make any findings of fact in the light of the applicable provisions of national law. If, as a

matter of Irish law, the transfer effected by the agreement of 9th February 1994 constitutes no more than “the simple transfer of

assets,” it seems clear that Article 5(8) does not apply. It does not meet the first element of the test and it does not matter that

there is no express finding regarding intention. For this reason alone, I am satisfied that there is no need to refer the Case Stated

back to the Appeal Commissioner for further findings of fact. In this light, it is unnecessary to consider whether the terms of the

agreement themselves constitute sufficient evidence of intention.

In my view, the agreement of 9th February 1994, to quote the Appeal Commissioner “involved the transfer of premises and fixtures

and fittings and no more than that.” Counsel for the Inspector agreed that, if this finding was correct, it followed from the judgment

in Zita Modes, that Article 5(8) did not apply to it. The agreement does not contain any provision for the sale of goodwill. The very

limited restraint of trade contained in Clause 24 did not amount to a transfer of goodwill. The fact that the vendors remained entitled

to carry on their existing business in the premises they were not selling is perhaps not helpful. There can be a transfer of part of a

business or undertaking. A restraint of trade is not to be equated with a sale of goodwill. The former may often accompany the latter,

but they are different things. In the present case, the period of the restraint was, in any event, very brief.

Nor did the arrangements about the re-employing of former employees of the vendor alter the character of the transaction.

Arrangements of the kind that took place in this case may possibly involve a “transfer of undertaking” so as to confer certain rights

on the employees, but that is not the test here.

Certain simple key features stand out. The agreement provided for the sale of premises and certain fixtures and fittings. No stock-in-

trade, debtors, liabilities or financial, assets of any kind were included. To the extent that both vendor and purchaser were in the

retail shoe trade, it was clear that the vendors’ business came to a complete halt and was closed down. The taxpayer company

started up again using its own stock, having re-employed a number of employees. All the indications both from the agreement and the

surrounding circumstances contradict the suggestion that the business was being transferred. Not only was the decision not

perverse, it was, in my view, patently correct.

I am satisfied that, section 3(5)(b), interpreted in the light of the Sixth Directive, did not apply. Since it did not apply, there was a

supply of “goods” within the meaning of the Value-Added Tax Acts. I would dismiss the appeal and uphold the decision of the Appeal

Commissioner.

Insofar as this decision involves an interpretation of a provision of Community law, I am satisfied that the matter is acte clair following

the decision of the Court of Justice in Zita Modes and this Court is not obliged to refer the matter for preliminary ruling pursuant to

Article 234 of the EC Treaty.