20235

VAT REGISTRATION – SINGLE OR SEPARATE BUSINESSES – Appellants purportedly ran bistro and sandwich bar as separate businesses –  they carried out the same type of catering business – sharing the same physical, legal and human resource infrastructure –  incapable of existing as separate businesses – reality a single business – Appeal dismissed

MANCHESTER TRIBUNAL CENTRE

	MR D HARRIS T/A FELLOWS SANDWICH BAR & 	Appellants
MRS M HARRIS T/A FELLOWS BISTRO
	- and -

	HER MAJESTY’S REVENUE and CUSTOMS	Respondents

			Tribunal: MICHAEL TILDESLEY OBE	 (Chairman)
				      MOHAMED FAROOQ Member)	  

Sitting in public in Birmingham on 30 April 2007

Richard Barlow counsel for the Appellants

James Puzey, counsel instructed by the Acting Solicitor for HM Revenue & Customs, for the Respondents

© CROWN COPYRIGHT 2007

DECISION
The Appeal
1.	The Appellants were appealing against the Respondents’ decision dated 7 November 2005 which ruled that Fellows Bistro and Fellows Sandwich Bar were one business with the consequence that the business was liable to be registered for VAT from a date to be established.
2.	The Appellants’ grounds of appeal were that Fellows Bistro and Fellows Sandwich Bar were separate businesses and separate entities.
The Disputed Issue
3.	The sole issue for determination was one of fact, namely whether Fellows Bistro and Fellows Sandwich Bar was one business or separate businesses. We were not required to determine whether Fellows Bistro and Fellows Sandwich Bar were liable to be registered for VAT, the date of registration and the amount of VAT due if any. These matters would depend upon our decision on the substantive issue and presumably subject to further decisions on the part of the Respondents.
The Evidence
4.	We heard evidence from the Appellants. Hilary Rhodes and Deborah Hardwick, the investigating officers, gave evidence for the Respondents. We received an agreed bundle of documents together with an additional bundle supplied by the Appellants.
5.	The Appellants, Mr and Mrs Harris, were husband and wife.  In May 2000 they purchased Fellows Sandwich Bar and Fellows Bistro together with the assignment of the lease for £27,000. The purchase monies came from the Appellants’ savings. The lease was for the whole premises held in the joint names of the Appellants. Prior to the purchase they ran a fish and chip shop in March, Cambridgeshire, as a partnership which ceased in 1995. They then ran another fish and chip shop in Lincoln for a short period of time, after which the Appellants took up employed positions. 
6.	The Appellants were aware that the previous owners operated Fellows Sandwich Bar and Fellows Bistro as two separate businesses. They discussed the situation with the vendors’ accountants who explained the relative advantages and disadvantages of continuing to run the businesses separately. The Appellants considered that it would be beneficial to carry on the separate businesses for VAT and tax reasons. 
7.	Mr Harris was responsible for the sandwich bar, with the bistro under the control of Mrs Harris.
8.	The businesses were carried out from premises at 15 Westgate Grantham. The sandwich bar was located at the front of the building with its entrance fronting on Westgate. The sandwich bar comprised a servery with a counter, and a sit down area with four tables and 12 covers. The bistro was at the rear, accessed via a door off a brick and concrete paved area at the side of the premises.  The bistro had eight tables with 24 covers and a sales counter. There was no internal access for customers between the sandwich bar and the bistro. There was living accommodation above the bistro and sandwich bar.
9.	The bistro and sandwich bar shared a kitchen which contained a single oven and grill, dishwasher and two fryers. A door from the kitchen led to a cellar in which there were four freezers and a fridge. The sandwich bar and bistro had their own dedicated freezers for the storage of frozen food. The businesses shared the fridge but had separate shelves allocated for the food used in each of the businesses.
10.	The customers of the bistro and sandwich bar shared the same toilet which was located in the bistro. The customers were prohibited from smoking in the sandwich bar but could smoke in the bistro. Mr Harris told the Respondents’ officers that customers in the sandwich bar would be directed to the bistro if they wanted to smoke. The Officers saw a notice in the sandwich bar advertising smoking facilities in the bistro.
11.	 The bistro and sandwich bar were open Monday to Saturday, 0730 to 1500 hours in respect of the sandwich bar, and 0730 to 1530 hours for the bistro. The same menu of snacks, meals and drinks were on offer at the same prices in both the bistro and sandwich bar. The menus uplifted by Mrs Hardwick on her unannounced visit on 8 September 2005 included a main menu and a takeaway menu available in both the bistro and the sandwich bar. The main and takeaway menus carried the words “Fellows Restaurant and Café; Martine and Dave 15 Westgate, Grantham, Lincolnshire”.  The Appellants stated that the single business portrayed by the uplifted menus was a mistake. They forgot to inform their daughter who arranged for the printing of the menus that the bistro and sandwich bar were separate businesses. At the hearing the Appellants produced separate menus for the bistro and sandwich bar which had been in use prior to the introduction of the uplifted menus. The separate menus were identical except for their title, “Fellows Café Menu” as against “Fellows Restaurant Menu. The menus displayed the same picture of the premises which showed the sandwich bar.
12.	Mr and Mrs Harris each employed two part-time members of staff contracted to work in either the bistro or the sandwich bar. According to Ms Hardwick, Mr Harris told her on 8 September 2005 that the part-time staff worked wherever required. However, on 2 November 2005 Mr and Mrs Harris in interview stated that their respective members of staff worked only in the business specified in their contracts of employment.  At the hearing Mr Harris could not recall what he said to Ms Hardwick on 8 September 2005. He accepted that when it was busy Mr and Mrs Harris and their respective members of staff would help each other out, “it was all hands to the pump, no use splitting hairs about the allocated place of work”. Mr Harris agreed he cooked meals for the bistro, particularly if there was an overlapping order in the sandwich bar. 
13.	Mr Harris did the cooking for the sandwich bar and dealt with the administration for both the bistro and sandwich bar. Mrs Harris looked after the front of the house in the bistro, serving coffees and cleaning tables. One of her part-time members of staff  was employed to do the cooking for the bistro.  When Ms Hardwick made her unannounced visit to the premises she was directed by Mrs Harris to speak to Mr Harris who was content to answer questions about both businesses.  Ms Hardwick and Ms Rhodes intended to interview the Appellants separately on 2 November 2005 but Mrs Harris was reluctant to be interviewed without the presence of her husband. A compromise was reached with simultaneous interviews in the same room.
14.	Mr Harris shopped on separate days for each of the businesses from Morrisons supermarket and the cash and carry. Some foodstuffs, however, were purchased for joint use which included salt & pepper, sauces, ice cream and apple pies. Mr and Mrs Harris confirmed in interview that they would use each other’s stock if they ran out of a particular item with no payment being made for the use of the other’s foodstuffs. 
15.	Mr and Mrs Harris held separate bank accounts for their respective businesses. Mr Harris kept the weekly cash sheets for each business which showed that expenses relating to the premises as a whole were met from the sandwich bar accounts. Mr Harris, however, charged Mrs Harris £180 per week for the bistro’s share of the premises costs. The Appellant’s accountants stated that the amount paid by Mrs Harris was set annually in advance to reflect 50 per cent of the anticipated cost of premises’ expenditure. The amount of £180 had not changed since the Appellants took over the businesses. Mr Harris explained that his accountants suggested the sum of £180. Mr Harris deducted drawings, wages and national insurance, and costs of food purchases from the weekly takings for each business with the remaining balance banked in the respective accounts. Mr and Mrs Harris submitted separate tax returns for the profits made in their respective businesses.
16.	The invoices for premises expenses including utility bills, waste removal and asbestos surveys were generally in the name of Mr Harris or in their joint names.  None of the invoices produced were split between the respective businesses. The sole invoice supplied in respect of the rent was in the name of Mrs Harris, which Mr Harris considered to be a mistake.  
17.	The Appellants used a sandwich board to advertise the bistro and the sandwich bar.  The principal trade for the sandwich bar was takeaways, selling about 95 per cent of the combined total of  takeaways from both businesses. The décor of the bistro and sandwich bar was different. The bistro was painted yellow with wooden ceiling beams and furniture made of wood. The café was painted green with stainless steel furniture. 
18.	Mr Harris told the Tribunal that they closed the businesses once when Mrs Harris was ill. Mrs Harris stated in interview that Mr Harris was unable to run both businesses when she was poorly.
19.	Mr Harris explained to the Tribunal that he was thinking about selling the sandwich bar as a separate entity. Mrs Harris’ sister showed an interest in purchasing it. However, Mr Harris accepted that it would be awkward selling off one of the businesses, particularly as the kitchen served both the bistro and the sandwich bar. 
20.	On 6 March 2006 the Appellants sold the businesses under a single sales agreement  to a Mr and Mrs Knight who registered for  VAT as a partnership with effect from 7 March 2006. The sale particulars advertised the two businesses as a single entity for the price of £65,000. The particulars mentioned that the bistro and sandwich bar traded as separate businesses, each below the VAT threshold. Under the sales agreement Mr and Mrs Harris contracted separately to sell the goodwill attached to their individual businesses. The purchase price of £65,000 was broken down into two payments of £25,750 for goodwill of the respective businesses, £10,000 for the lease and £3,500 for trade fittings and equipment.
Reasons for the Decision
21.	The issue in dispute was whether the bistro and sandwich bar was a single business or separate businesses. The High Court held in Burrell (t/a the Firm) v C & E Commissioners [1997] STC 1413:
“ In deciding whether two businesses were carried on separately a tribunal should examine the substance and the reality and could only conclude that there were separate taxable entities if the so called businesses were sufficiently at arms length from one another, and had normal commercial relationships each with the other”.
22.	The Appellants submitted that their businesses were capable of being operated separately and on the evidence the businesses were being run as separate entities. The Appellants kept separate accounting records, held their own bank accounts and were assessed individually for income tax on the profits from their respective businesses. The Appellants employed their own staff, purchased separately the foodstuffs for their individual businesses which were kept in separate freezers or on dedicated shelves within the fridge. Each of the Appellants had sole responsibility for the running of their business. The bistro and the sandwich bar were located in designated parts of the premises with separate entrances and no internal means of access for customers connecting the two parts of the premises. The bistro and the sandwich bar were distinguished from each other by their décor and furniture, their clientele and the nature of their business with takeaways constituting a significant part of the trade for the sandwich bar.  Mrs Harris paid Mr Harris a weekly sum for the use of the cooking facilities and for her business’ share of the premises costs. The fact that the Appellants had chosen to run their businesses separately for tax reasons was irrelevant. The Appellants were not acting unlawfully. They were entitled to organise their tax affairs to minimise the tax consequences. The Tribunal should give weight to the Appellants’ intentions to run separate businesses.
23.	The Respondents contended that in substance and reality the Appellants were operating a single business. The businesses were purchased and sold as a single entity. The two businesses were not capable of separate operation. They shared the kitchen and toilet facilities. The businesses were dependent upon the cooking and organising skills of Mr Harris. The reality was that the businesses operated “hand-in-glove” with each other using the same foodstuffs, operating the same menu and effectively having the same opening hours. The businesses were promoted and marketed as one business. The Appellants’ evidence and their replies to the questions of the investigating officers revealed the disconnection between the formal arrangements and the actual operation of the businesses. There were no hallmarks of a commercial relationship between the businesses which were not at arms length from each other. 
24.	The High Court in Burrell laid out guiding principles but did not give guidance on the facts that a Tribunal should consider in determining whether there were separate businesses. Essentially it was for the Tribunal to decide the issue on the facts of the individual case.
25.	 Our starting point in this Appeal is the nature of the businesses. They were in the catering business each offering a table and takeaway service. They operated from the same premises under the terms of a common business lease held jointly by the Appellants. The operations were dependent upon the shared facilities of a customer toilet and a kitchen which included shared appliances such as an oven and grill. The success of the businesses was critically reliant on the skills and expertise of Mr Harris who did the purchasing and administration for both businesses. Mrs Harris was not good at paperwork. Out of the Appellants, only Mr Harris did the cooking.
26.	 The businesses were purchased from joint savings of the Appellants. The completion statement of their purchase on 2 May 2000 showed that a single business was bought for a single price. The Appellants supplied no evidence that they paid separate amounts for the businesses. The Appellants asserted that it was possible to sever the businesses, mentioning that Mrs Harris’ sister was interested in taking over the sandwich bar. However, Mr Harris in evidence accepted the impracticality of severance with his statement that it would be awkward to share a kitchen. Although in their  sales agreement dated 3 March 2006 the Appellants distinguished  the purchase prices for the goodwill of  the respective businesses, we are satisfied that this was done to protect the Appellants’ interests arising from the investigation of their  liabilities for VAT.  We find that the reality of the sales documents was that the businesses were advertised and sold as a single entity. The purchasers registered the businesses for VAT as a partnership with effect from the immediate day following the sale.
27.	The physical, legal and human resource infrastructure for the two businesses which together with the striking similarities in the nature of their business activities ensured that the businesses were inextricably linked to one another, rendering them incapable of existing as separate business entities.
28.	The shared infrastructure for the two businesses meant that they had to be run as one business which was demonstrated by the evidence on the actuality of the operations. They sold the same meals and beverages including takeaways at identical prices from the same menu. They used the same foodstuffs to prepare their meals. The opening hours of the two businesses were virtually identical. The Appellants promoted their enterprise as a single business under their joint control. 
29.	The different working practices relied upon by the Appellants to support their assertion of separate businesses were ones of form rather than substance. The requirements in the contracts of employment stipulating that members of staff perform their duties in either the bistro or the sandwich bar were overridden when the Appellants were busy. Mr Harris cooked meals for both businesses. The supposed practice of purchasing and storing separately the foodstuffs for the bistro and sandwich bar made no sense when they were operating from the same menu. The Appellants’ evidence of sharing specific foodstuffs and using each other’s food when they ran out questioned whether separate purchases were in fact made. There was no evidence from the Appellants that the different décors for the bistro and the sandwich bar arose from a conscious decision on their part to set up distinctive identities for the businesses. 
30.	Mrs Harris’s weekly payment of £180 to Mr Harris for the bistro’s share of premises costs remained constant throughout the duration of their tenancy. The £180 was not calculated from the costs of the actual resources consumed by the bistro. Mr Harris controlled the separate accounting records and bank accounts for the businesses. The use of Mrs Harris’ bank account was minimal. The fact that Mr and Mrs Harris were assessed separately for income tax was a consequence of their decision purportedly to run two businesses. It was of no probative value in determining whether the bistro and sandwich bar were separate businesses. 
The Decision
31.	We are satisfied for the reasons set out in paragraphs 24 to 30 that the substance and reality of Fellows Bistro and Sandwich Bar was that it was a single business. In substance they carried out the same type of catering business sharing the same physical, legal and human resource infrastructure rendering them incapable of existing as separate businesses. The reality was that the Appellants ran them as a single business. The Appellants’ arrangements to portray their business as separate entities were artificial, and not at arms length with Mr Harris defining the terms of the relationship between the two purported businesses. 
32.	The parties made submissions about whether Mr and Mrs Harris operated as a partnership. We did not consider that a finding on whether a partnership existed was determinative of the substantive issue under Appeal. We consider that the facts found supported the existence of a partnership between Mr and Mr Harris, particularly as the business was purchased with joint funds. However, a case could be made for a sole trader business in the name of Mr Harris in view of his dominant role with the running of the business. 
33.	We, therefore, dismiss the Appeal and make no order for costs. 

                                                               

                                 MICHAEL TILDESLEY OBE
CHAIRMAN
RELEASE DATE: 3 July 2007

MAN/