MHA | VAT – business and non-business activities

VAT – business and non-business activities

Posted on: July 22nd 2022 · read

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A recent brief published by HMRC sets out their updated approach to determining whether an activity is a business or non-business activity for VAT purposes.

Like so much tax law, HMRC’s policy for assessing whether an activity is of a business or non-business nature is grounded in case law. The 1981 Lord Fisher and 1978 Morrison’s Academy Boarding Houses Association cases in particular helped create the six criteria ‘business test’ previously used in making such an assessment:

  1. Is the activity a serious undertaking earnestly pursued?
  2. Is the activity an occupation or function that is actively pursued with reasonable or recognisable continuity?
  3. Is the activity have a certain measure of substance in terms of the quarterly or annual value of taxable supplies made?
  4. Is the activity conducted in a regular manner and on sound and recognised business principles?
  5. Is the activity predominately concerned with the making of taxable supplies for a consideration?
  6. Are the taxable supplies that are being made of a kind which, subject to differences of detail, are commonly made by those who seek to profit from them?

HMRC’s long-standing policy had been that a business activity is possible even in the absence of a profit motive. However, more recent judgements, such as those in the 2016 Longridge on the Thames and 2018 Wakefield College cases, have helped clarify that the criteria above are only indicators and that they cannot replace the principles set out by the courts in determining what constitutes a business; in determining this, there should be no reliance on an organisation’s overall objective or profit motive. The recent cases have helped develop a new two-stage test, detailed below, which should be taken instead of the six criteria business test above:

  1. Stage 1 - The activity results in a supply of goods or services for consideration
    An activity that does not involve the making of supplies for consideration cannot be business activity for VAT purposes.
  2. Stage 2 - The supply is made for the purpose of obtaining income therefrom (remuneration)
    Even if the charge is below cost.

Whilst this change in approach is relevant to all not for profit entities, given the nature of the cases which resulted in the change, it will be particularly relevant to entities providing nursery and creche facilities and those receiving grants or subsidies. We expect to provide further guidance in the coming months as this ruling develops further.

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