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	United Kingdom VAT & Duties Tribunals Decisions
You are here: BAILII >> Databases >> United Kingdom VAT & Duties Tribunals Decisions >> Danielon v Revenue and Customs [2005] UKVAT V19244 (12 September 2005) URL: http://www.bailii.org/uk/cases/UKVAT/2005/V19244.html Cite as: [2005] UKVAT V19244

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19244

VAT — BUSINESS — acquisition as a going concern — assets used by a former restaurant business sold by executors of deceased restaurateur — incoming proprietor negotiating fresh lease with landlord — no transfer of goodwill — whether there existed such continuity as enabled the carrying on of substantially the same business as by deceased proprietor — no — whether incoming proprietor compulsorily registrable for VAT because deceased's business transferred as a going concern — no — appeal allowed

MANCHESTER TRIBUNAL CENTRE

FRANCESCO DANIELON Appellant

- and -

HER MAJESTY'S REVENUE AND CUSTOMS Respondents

Tribunal: Michael Johnson (Chairman)

Roland Presho

Sitting in public in North Shields, Tyne and Wear on 26 July 2005

Fred Charlton, accountant, for the Appellant

Jonathan Cannan, counsel, instructed by the Acting Solicitor for HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2005


 


DECISION

1. The issue in this appeal is whether the business of a restaurant was transferred to the Appellant as a going concern. If it was, the Appellant would then, irrespective of his trading circumstances since the transfer, have been obliged to register for VAT pursuant to section 49(1) of the Value Added Tax Act 1994 ("the Act"). However if there was no such transfer, that section would not apply, and the Appellant would only become registrable for VAT in respect of the business carried on by him at the premises as and when he might otherwise become so liable as provided by Schedule 1 of the Act.
2. The only witness from whom the tribunal heard oral evidence was the Appellant Mr Danielon himself, who was represented by his accountant, Mr Charlton. We also had the benefit of a folder of documentation, prepared and handed in by Mr Cannan, counsel appearing for Her Majesty's Revenue and Customs ("HMRC"). This contained copies of the Notice of Appeal, the Statement of Case for HMRC, a written Statement to the Tribunal by the Appellant, the correspondence between the representatives of the parties, Mr Danielon's VAT registration details and various documents relating to the sale to him.
3. We find the following facts.
4. The late Cavaliere Vincenzo Barbaro (whom we will call "the late Mr Barbaro") died on 29 August 2003, a Friday. When he died, he was the tenant of premises (which we will call "the premises") located at 36 Cockton Hill Road, Bishop Auckland. His landlord was Mr Gurjeet Singh Samra, of Glenfield, Leicester. Down to the date of his death, Mr Barbaro operated the premises as an Italian restaurant (which we will call "the restaurant"). At the time Mr Barbaro died, the Appellant Mr Danielon was joint head waiter of the restaurant.
5. Following Mr Barbaro's death, the restaurant closed until Tuesday, 2 September, when it reopened for business. On that day, 2 September 2003, Adams, accountants of Spennymoor, wrote to H M Customs and Excise on behalf of the late Mr Barbaro's Executors to say that the Executors intended to carry on the business in the short term until the position with regard to the business had been clarified.
6. However the Executors only continued to trade for a week. On Tuesday, 9 September, Mr Barbaro's son told Mr Danielon that the restaurant was shutting down, as from that day. The Barbaro family had another establishment, across town, that they wished to concentrate on in future.
7. Mr Danielon discussed his position with his wife. He decided to make an offer in relation to the assets of the business, which he did immediately. Mr Barbaro's son received the offer, made verbally, indicating that for himself he was in favour of selling to Mr Danielon, but that he would need to discuss the offer with the rest of the Barbaro family.
8. After a few days, Mr Danielon was contacted by the Barbaros, who declined his offer to purchase. However they then appeared to change their minds. On 15 September 2003, Mr Danielon attended at the office of Mr Anthony Walters, a solicitor, of Victoria Avenue, Bishop Auckland. Mr Walters and Mr Vincenzo Domenico Barbaro were the Executors of the late Mr Barbaro.
9. The object of Mr Danielon attending the solicitor was for the purchase of assets to be negotiated. The Executors offered to sell for £10,000. Mr Danielon counter-offered £6,000, which was accepted.
10. By that stage, Mr Danielon had only a rough idea of what he was buying. He knew that the restaurant had been closed for a week. He moreover knew that the position with the landlord of the premises was uncertain, because the late Mr Barbaro had been in dispute with his landlord over repairs to the premises, and had in consequence been withholding rent.
11. Mr Danielon did not know how much equipment he would find in the premises for his £6,000. He knew that some of the equipment was not for sale, because the Barbaros were going to have it for their other establishment across town. But, at bottom, Mr Danielon was not too worried about the contents of the premises; the main thing for him was to "get the keys" (ie become tenant of the premises), as he said in evidence: he wanted to be the late Mr Barbaro's successor in the premises.
12. Mr Danielon discussed the lease position with Mr Walters. Mr Walters telephoned the landlord, Mr Gurjeet Singh Samra, and persuaded him to grant a new lease to Mr Danielon. Mr Walters then prepared the new lease, and Mr Danielon took it down to Leicester for the landlord to sign, which he duly did. Mr Danielon entered into the lease as his tenant. We have seen a copy of the lease; it relates to the ground floor restaurant of 36 Cockton Hill Road and is for the term of 5 years from 16 September 2003 to 16 September 2008. The rent is for £6,500 per annum, payable by equal monthly instalments on the 16^th day of each month.
13. Mr Danielon also entered into a written Agreement dated 17 October 2003 with the Executors of the late Mr Barbaro for the purchase of fixtures, fittings and equipment at the premises in consideration of payment of the agreed sum of £6,000. The items purchased are listed, one by one, in the Schedule to the Agreement. The Agreement was duly signed and witnessed by both parties; quite why it was not dated until 17 October 2003 is unclear.
14. At the meeting with Mr Walters on 15 September 2003, Mr Walters told Mr Danielon that Mr Carlo Barbaro was taking some equipment from the premises. Mr Danielon told the tribunal that, so far as he was concerned, Mr Barbaro "could have taken everything". Mr Danielon told us: "For me the keys were everything – I knew I needed new equipment". However, Mr Danielon told us, he didn't think that the Barbaros would take as much as they did. When, having agreed to buy, Mr Danielon checked what was left in the premises, he was shocked at what he found.
15. On either 17 or 18 September 2003, Mr Danielon picked up the keys to the premises. When he inspected the premises, as they stood by that time, all the modern, efficient equipment had been removed. All the crockery had been taken. The main pizza machines, refrigerator and freezer were all absent. Mr Danielon spoke to Mr Walters about this, and was told that some of the equipment had gone to Mr Carlo Barbaro, and some "into the skip".
16. Mr Danielon made no efforts to get any of the removed equipment back. Instead he purchased new equipment, upgraded and refurbished the premises, and opened for business under a new name. The former business was called "Mr Barbaro's". Mr Danielon trades as "Casa Nostra". Three out of six waiters, and the same chef, stayed with him. The telephone number is the same, and the business is that of an Italian restaurant, as before.
17. We find that Mr Danielon all along intended that he should reopen the premises as a restaurant. We think that it was just a question of agreeing terms, with the landlord and with the Executors of the late Mr Barbaro, to make it possible for that to happen. We find that, viewing the evidence in the round, the Executors probably all along intended to sell to Mr Danielon, provided that he would pay good money for the obsolete equipment which was all that the Barbaros intended to leave in the premises. In other words, they were stringing Mr Danielon along until that point was reached. But he was clever enough to accept what was on offer "warts and all" and not attempt to drive too hard a bargain.
18. We think that the final state of affairs was entirely satisfactory so far as Mr Danielon was concerned. He was not naïve; he was not "duped". The important matter to Mr Danielon was to obtain the right to possession of the premises – the introduction to the landlord, as it were. This he achieved very well by dint of visiting Mr Walters on 15 September 2003. The equipment that might remain in the premises was not the important factor. He was happy to pay £6,000 for whatever he was able to get at that point, so long as it included the succession to the late Mr Barbaro as restaurateur, which in the event it did.
19. For HMRC, Mr Cannan submitted that the upgrading or refurbishment of transferred premises in the hands of the transferee did not by itself mean that the premises had not been transferred as a going concern. That was insufficient without more. He submitted that the goodwill of the restaurant had been obtained by Mr Danielon with the concurrence of the Executors. Mr Danielon reopened the business with largely the same staff – he was himself known as the head waiter, and would be a familiar figure to customers returning after the refurbishment.
20. Mr Cannan referred us to the statements of principle in Kenmir Ltd v Frizzell [1968] 1 WLR 329 at 334C and 335C – F per Widgery J, delivering the judgment of the court. These passages highlight the importance to the issue we are deciding of a "smooth and unbroken continuity between what was happening before and after the transfer", and indicate that the absence of an express assignment of goodwill is not conclusive, if the transferor ^[1] has effectively deprived himself of the power to compete, and moreover that " … the absence of an assignment of premises … will … not be conclusive if the particular circumstances of the transferee nevertheless enable him to carry on substantially the same business as before".
21. Mr Cannan also cited E C Reese Agricultural Ltd v Commissioners of Customs and Excise (2003) VAT Decision 18358, in which the tribunal derived from the authorities seven principles for determining whether there has been a transfer of a going concern, contained in paragraph 31 of that decision, which the tribunal proceeded to apply to the facts of that particular case.
22. Mr Cannan submitted that the removal of the equipment was not decisive in the present case. Section 49(1) of the Act, he said, required only that there should be a business being carried on by a taxable person, in this case the late Mr Barbaro, which business was then transferred as a going concern. That was what the Executors had done. He submitted that the business did not cease to exist because it had vested in the Executors.
23. For the Appellant, Mr Charlton submitted that there was no doubt that the business had ceased. There was no assignment of the goodwill, ie of the late Mr Barbaro's customers. The premises closed whilst owned by the Executors. The equipment to enable the Executors, or anyone else, to trade, was removed. The closure took place on 9 September 2003.
24. By the time Mr Danielon purchased, Mr Charlton submitted, the consequence of the closure had been underlined by the removal of the equipment. Mr Danielon therefore purchased only the shell of a former business, and not a business which was a going concern.
25. In deciding this appeal, we are mindful that the Executors of the late Mr Barbaro were not in the same position as Mr Barbaro himself. Essentially the Executors needed to decide to do one of three things, namely to keep the business running on behalf of the beneficiaries of the estate of the late Mr Barbaro; alternatively to sell it as an operating business; alternatively to distribute or sell the assets of the business.
26. The Executors' initial decision was to keep the business running – this appears from the letter dated 2 September 2003 referred to in paragraph 5 above.
27. The facts we have found show that this decision changed quite quickly. Within a week of sending the letter, the Executors had closed the doors of the premises. We think that they probably did this having regard to two factors –

Mr Carlo Barbaro was keen to have some of the chattels in the premises, which the Executors had decided that he could take;

The position under the lease was problematic to the tenant, and hence to the estate of the tenant.

28. The Executors had, we think, decided that in the light of these factors they could not put together a package which would be attractive to an arms-length purchaser. Their only hope with regard to this asset comprised in Mr Barbaro's estate was to interest Mr Danielon in paying something for what little the Executors had to sell, whilst hopefully persuading the landlord to grant Mr Danielon a fresh lease.
29. Fortunately all went well from the Executors' point of view – the landlord was prepared to grant Mr Danielon a fresh lease, and Mr Danielon was prepared to pay £6,000 just to get into the premises.
30. We think that the above analysis shows that Mr Charlton is correct in submitting that what was sold in the present case was not a business as a going concern, but a package of assets – and not an attractive package of assets at that. In particular, the package sold did not include the ability to carry on trading. That was dependent firstly upon Mr Danielon's agreement with the landlord, and secondly on his replacing all the equipment taken by Mr Carlo Barbaro that prevented Mr Danielon simply from reopening the doors of the premises.
31. We think that it is not right to say, as Mr Cannan submits, that the Executors transferred to Mr Danielon the goodwill of the restaurant, either expressly or impliedly. Such goodwill as attached to the premises was obtained by Mr Danielon in consequence of the fresh lease, and not the sale. At the same time, the Barbaro family continued to operate another establishment across town, which we feel would be likely to inherit some of the goodwill enjoyed by the late Mr Barbaro from the restaurant. The Agreement dated 17 October 2003 related only, as its contents confirm, to the assets listed in the Schedule to it.
32. We find that the Executors had decided to break up the business before they treated with Mr Danielon, so that no deal that they might do with him would enable him in practice to inherit the self-same business formerly carried on by the late Mr Barbaro. Indeed Mr Danielon had no intention of carrying on the same business, since he was of the opinion that much of the existing equipment was not legally compliant.
33. In this regard, we ask ourselves the question, how might Mr Danielon have proceeded had the landlord in Leicester not been so cooperative? Whilst Mr Walters had used his good offices to broker the fresh lease, it was outside his control if the landlord ultimately refused to grant the fresh lease (for example because the landlord wanted a final settlement with the estate over the previous lease before granting a fresh one, which would have been a reasonable position for him to adopt).
34. Accordingly the present case is, in our view, to be distinguished from the situation where a tenant dies and his estate assigns the residue of the term of his lease to a purchaser as part of a package including the goodwill of a business carried on in the premises and all the fixtures, fittings and equipment necessary to carry on the business. In that case, there would as we see it almost inevitably be the transfer of a going concern. However that is not this case. In this case, all that the estate of the late Mr Barbaro sold to Mr Danielon was some of the assets within the premises.
35. Applying the tests referred to in the Kenmir and E C Reese Agricultural Ltd cases respectively, we therefore think that the Appellant has demonstrated to our satisfaction that his purchase is not to be characterized as the transfer to him of the business of the late Mr Barbaro, within the meaning of section 49(1) of the Act, so that he was not required to register for VAT unless and until Schedule 1 of the Act might apply to his case.
36. This appeal is therefore allowed. We decide that the decision under appeal, namely that initially contained in the letter of H M Customs and Excise dated 2 February 2004 to Mr Al-ani of Global Accountancy, Middlesbrough, subsequently reiterated more than once, was incorrect.
37. Mr Cannan indicated to the tribunal at the conclusion of the hearing that HMRC reserved their position as to costs, should the appeal be allowed. We therefore make no ruling as to costs at this stage, but we give liberty for either party to have the appeal restored to the list for the limited purpose of argument as to costs. Before this is done, we direct that costs should be quantified by each party respectively on an item-by-item basis and listed in schedules which should be mutually exchanged between the parties and lodged with the tribunal. The appeal should only be relisted if agreement cannot be reached both as to payment of costs and their amount.

MICHAEL JOHNSON

CHAIRMAN
Release Date: 12 September 2005

MAN/04/0681

Note 1    (the report says “transferee” at page 335F, but we think that “transferor” must be meant)    [Back]