Transfer of a Business or Part of a Business
Question 1
Where a business is transferred, the assets that may be transferred can normally be
sub-divided as follows: premises, employees, plant and machinery, stock, goodwill,
intellectual property, debtors. The classic transfer of a business will comprise all
seven. Some businesses may not have some of these items, for example, there may
be no plant, machinery or stock where the business is a service business. Where
part of a business is transferred and incorporated into the business of the purchaser
it may be difficult to decide whether the exemption applies.
On what basis does Revenue consider that the relief applies if some part of the
classic seven items are transferred with some of such items being retained?
Example
In a sale of business assets the following items are retained or, as the case may be,
sold by a taxable person:
Retained by Vendor
Premises
Debtors
Employees
Sold by Vendor
Plant & Machinery
Goodwill
The purchaser, another taxable person, incorporates the plant and machinery and
the goodwill into his taxable business. Will transfer of business exemption apply? If
the situation is uncertain, what features will the Revenue look for to qualify or
disqualify such a transaction from the exemption?
Response to Question 1
It is considered that the tax treatment in the scenario posed is covered adequately in
paragraph 4.1 of Information Leaflet No.1/02. In order to qualify for the exemption,
the transfer must be made to another person where that other person intends to use
the goods or services supplied for the purposes of a taxable business and where the
goods or services constitute an amalgam of assets capable of assisting in the
realisation of the business. It is not a requirement that the transfer must constitute a
transfer of a business as a going concern. The issue in the scenario posed is
whether or not the goodwill assists in the realisation of the purchaser’s business. If it
does not, the transfer of the plant & machinery could be viewed as the simple sale of
an asset and subject to VAT. However, it is more than likely that the transfer of plant
& machinery and goodwill would meet the criteria set out in paragraph 4.1 of the
Information Leaflet.
Question 2
In the transfer of a business or part of a business qualifying for the exemption does
Revenue require any identity between the business formerly carried on by the vendor
and the business subsequently carried on by the purchaser?
Response to Question 2
Again, it is considered that this question is covered adequately in paragraph 4.1 of
Information Leaflet No.1/02. Similarity between the former business carried on by
the vendor and the business carried on by the purchaser is not a prerequisite for
qualification for the exemption.
Question 3
Where the business or part of a business of an Irish taxable person is transferred to a
taxable person in another Member State does the transfer of business exemption
apply?
Example
X Limited, an Irish company, carries on a computer software business in Ireland but
trading mainly with companies located in Scotland where a cluster of high-tech
companies use the products of X Limited. The goodwill is therefore located in
Scotland. X Limited sells the computer software business to Y Limited, a company
located in Hungary. Y buys the intellectual property, goodwill and the debtors of X
Limited with the intention of carrying on the business. Will this be a transfer of a
business for VAT purposes?
Response to Question 3
In general, a person who, otherwise than as an employee of another person,
engages in the supply, within the State, of taxable goods or services in the course or
furtherance of business is a taxable person for the purposes of Irish VAT law –
section 8 of the Value Added Tax Act 1972, as amended, refers.
In the scenario posed what is envisaged is the sale by an Irish- registered company,
X Limited (assumed to be a service company involved in the supply of custom-made
software rather than just the sale of goods) of its business to another company, Y
Limited, which is not registered or established in Ireland. Thus, the sale of the
goodwill and the intellectual property by X Limited are not covered by section 5(8) of
the Value-Added Tax Act 1972, as amended, as it is not a transfer by a taxable
person to another taxable person.
The sale of the intellectual property is a Fourth Schedule service taxable where
received on Y Limited, the Hungarian company. In so far as the goodwill is
concerned, a supply that is described simply as “goodwill” cannot be considered as
falling within the Fourth Schedule rules, which cover intellectual property.
Consequently, a simple sale of the goodwill is covered by the normal place of
establishment rules and is liable to Irish VAT at 21 per cent, with Y Limited being able
to claim a refund under the Eight VAT Directive. However, goodwill is often used to
describe part of another supply of services such as permission to use a logo, etc., in
which case Revenue would treat its supply as a Fourth Schedule service.
The sale of debtors is not a supply of goods or services. Any goods going with the
transfer of the business would not be covered by section 3(5)(b)(iii) of the ValueAdded Tax Act 1972, as amended, as this would not be a supply of goods from one
taxable person to another. Accordingly, the normal place of supply of goods rules
would apply, thus making the supply of the goods a zero-rated intra-Community
acquisition if Y Limited is registered for VAT in Hungary.
Question 4
Where a taxpayer carries on the business of making short-term lettings for
warehousing purposes of a building, can the transfer of the building plus the goodwill
of the business amount to a transfer of the business?
Response to Question 4
The warehousing of goods, which involves the provision of ancillary services such as
security, maintenance of inventory as well as storage, is a taxable activity in itself and
would not be regarded as short-term letting.
The ECJ judgment in the Zita Modes case (C-479/01) stated that an amalgam of
assets must constitute an undertaking or part of one capable of carrying on an
independent economic activity (Irish VAT law contains the phrase “capable of being
operated on an independent basis”). That judgement also confirmed that it must be
the intention that the transferee will carry on the business. As such, the transfer of
the building by a warehousing business plus the goodwill could qualify for exemption
under section 3(5)(b)(iii) of the Value-Added Tax Act 1972, as amended.
If the warehouse operator doesn’t own the building in which the warehousing
business is carried on but short-term lets it from a landlord, and as part of a transfer
of the business assigns the lease or creates a sub-lease to the new owner, then the
transfer would be outside the scope of VAT.
Where a taxpayer owns a building and short-term lets it to a business which uses it
for warehousing, for example, then, in line with Revenue’s existing treatment, section
3(5)(b)(iii) of the Value-Added Tax Act 1972, as amended, would heretofore not have
applied. However, the concept of undertaking (Zita Modes) and “business” could
include the exploitation of tangible or intangible property for the purposes of obtaining
income therefrom on a continuing basis. Accordingly, in future Revenue will accept
that the transfer of a let property is a transfer capable of coming within section
3(5)(b)(iii) of the Value-Added Tax Act 1972, as amended. This, however, will apply
only when the person acquiring the letting business is a taxable person in respect of
the “business” being acquired. For example, if the person acquires a letting business
where there are short-term lettings and that person does not waive their exemption in
respect of those lettings, then section 3(5)(b)(iii) of the Value-Added Tax Act 1972, as
amended, will not apply to such a transfer. Similarly, where a person acquires a
letting business where the vendor has let out on long leases, the purchaser is not a
taxable person in respect of the lettings and therefore the sale will not come within
section 3(5)(b)(iii) of the Value-Added Tax Act 1972, as amended.
Question 5
Where a development company with sites, development contracts, partially
completed buildings and buildings that are let on long leases transfers its operation,
will the transfer of business exemption apply?
Response to Question 5
It is assumed that the reference is to a property development company. It is implicit
in section 3(5)(b)(iii) of the Value-Added Tax Act 1972, as amended, that it applies
only to the supply of goods or services that would otherwise be taxable. The supply
of sites or buildings let on long leases would not come within the ambit of the section
unless the supply would otherwise be taxable. As regards supplies that would
otherwise be taxable, the application of the relief depends on whether the supply is
made in the course of a transfer of a business or part of a business that is capable of
being operated on an independent basis. The mere sales of sites would not be such
a transfer.
In the circumstances, it is not possible to provide a conclusive answer to this
question. The question as to whether the transfer of business exemption would
apply in individual cases such as the one outlined would be considered based on the
full and particular circumstances of the case concerned. If the transfer has all the
usual indications of a transfer of a business (e.g. transfer of plant, employees,
goodwill, etc.) then the relief would apply.
Question 6
Where a co-owner in a partnership (registered for VAT as a partnership) operating a
construction business with, say, a 40% share in the partnership, transfers his interest
in the partnership to a third party who then becomes a partner with the continuing
partner, will the transfer of the share in the partnership qualify for the transfer of
business exemption in respect of that transfer?
Example
Jones and Smith are the limited partners in a limited partnership with Murphy as
general partner. Jones has a 30% stake, Smith a 25% stake and Murphy a 45%
stake. The partnership is engaged in the construction and letting of commercial
buildings. Some of the properties held are let on long leases and to taxable persons
and some are undeveloped and partially developed sites. If Smith sells his 25%
stake to Greene will the transfer of business exemption apply on the basis that
Greene registers for VAT as part of the limited partnership?
If the answer is that the exemption does not apply, would the answer be different if
the limited partnership had been exclusively engaged in another business such as,
for example, the manufacture and sale of furniture?
Response to Question 6
In the case of partnership where a partner exits the partnership and sells out to a
new partner, then section 3(5)(b)(iii) of the Value-Added Tax Act 1972, as amended,
will apply.
In the case of a co-ownership, Revenue is prepared to change its current treatment
under which the sale by a co-owner of his or her interest in the co-ownership is
regarded as a sale of an interest in property. Revenue will now regard such a sale
as the sale of a business to which section 3(5)(b)(iii) of the Value-Added Tax Act
1972, as amended, can apply.
Question 7
One of the reasons practitioners feel obliged to obtain a ruling from the Revenue on
transfers of business is the fear that the inspector for the vendor and the inspector for
the purchaser may take opposing views on whether the exemption applies. Can
anything be done to remove this source of anxiety?
Response to Question 7
Revenue would expect that the inspector for the vendor and the inspector for the
purchaser should take the same view on the question of the application or otherwise
of the exemption. The problem that arises for Revenue is that the facts provided
from purchaser and vendor often differ, and this leads to possible different
interpretations. Moreover, queries on the matter are often made very close to (or
sometimes on) the day of the sale and an immediate decision is sought.
VAT is a self-assessment tax. Perhaps the best possible way to deal with the fear of
different interpretations arising on the transfer of a business is for the respective
solicitors acting for the purchaser and vendor to include a clause in the sale contract
that the transfer in question is or is not a transfer that is in accordance with section
3(5)(b)(iii) of the Value-Added Tax Act 1972, as amended. The contract can then be
inspected by Revenue at a future audit, etc. The solicitors and the vendor and
purchaser are, after all, the people with all the information pertaining to the transfer.
In general, though, Revenue is prepared to state that it will not seek to have the
application of section 3(5)(b)(iii) of the Value-Added Tax Act 1972, as amended, set
aside where a vendor has obtained an assurance that the purchaser intends to use
the assets acquired for a taxable purpose.
Question 8
Does the transfer of a pub licence in isolation (i.e. with no other accompanying
assets) come within the ambit of section 3(5)(b)(iii) of the Value-Added Tax Act 1972,
as amended?
Response to Question 8
Technically, such a transfer would not qualify as the licence, in itself, does not
constitute an undertaking or part of an undertaking capable of being operated on an
independent basis; the licence is no more or less than an entitlement or right to carry
on a licensed pub trade. Nonetheless, Revenue is prepared to treat the sale or
transfer of a pub licence from one taxable person to another taxable person as
coming within the ambit of section 3(5)(b)(iii) of the Value-Added Tax Act 1972, as
amended. However, the transfer of the licence to a person who is not fully taxable
for VAT purposes will continue to be subject to VAT at the standard rate of 21%.
Question 9
X Limited, an Irish company, carries on a fully taxable business. X Limited sells the
business to Y Limited, including all stock and goodwill, with the employees also
transferring. As part of the transfer, X Limited creates long leases in the properties in
which the trade is carried on to Y Limited. Would the creation of the otherwise VATable leases be free of VAT pursuant to section 3(5)(b)(iii) of the Value-Added Tax Act
1972, as amended?
Response to Question 9
The Zita Modes judgement stated that an amalgam of the assets transferred must
constitute an undertaking or part of one capable of carrying on an independent
economic activity (Irish VAT law refers to “capable of being operated on an
independent basis”.). It is not necessary that all the assets of the business be
transferred. Revenue can see no distinction between a case in which a trader
decides to hold on to part of the assets (e.g. a part of a business) and one in which
he retains a free-hold but creates a long lease to the purchaser of the business.
Accordingly, provided what is transferred constitutes an amalgam of assets capable
of being operated on an independent basis, Revenue would regard the transfer in the
scenario posed in the question as coming within the ambit of section 3(5)(b)(iii) of the
Value-Added Tax Act, 1972, as amended.
VAT Interpretation Branch
Indirect Taxes Division
July 2007