Policy paper

VAT — business and non-business activities

Published 1 June 2022

Purpose of this Brief

This brief explains how HMRC now approaches determining whether or not an activity is a business activity for VAT purposes.

HMRC previously accepted that where a charity supplies nursery and crèche facilities for a consideration that is fixed at a level designed to only cover its costs, this is not a business activity for business purposes. This was based on the courts’ decisions in Yarburgh Children’s Trust [2002] STC 207 and St Paul’s Community Project [2005] STC 95. Details on this are set out in Business Brief 02/05: VAT — Supplies of nursery and crèche facilities by a charity.

Recent court cases have provided further clarification on how to determine whether or not an activity is a business activity. In determining this, there should be no reliance on an organisation’s overall objective or profit motive.

Who needs to read this

You should read this brief if you are:

• a charity organisation
• a non-profit making organisation
• business providing nursery and crèche facilities
• a business that receives grants or subsidies
• an organisation or a business carrying out non-business activities

Background

Historical cases

The principles laid down in the cases of Lord Fisher [1981] STC 238 and Morrison’s Academy Boarding Houses Association [1978] (’Morrison’s Academy’) have historically been used to decide whether an activity is business or economic activity for VAT purposes. The 6 criteria that emerged from both cases, known as the ‘business test’, include:

• is the activity a serious undertaking earnestly pursued
• is the activity an occupation or function that is actively pursued with reasonable or recognisable continuity
• is the activity have a certain measure of substance in terms of the quarterly or annual value of taxable supplies made
• is the activity conducted in a regular manner and on sound and recognised business principles
• is the activity predominately concerned with the making of taxable supplies for a consideration
• 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

In Yarburgh Children’s Trust [2002] STC 207 and St Paul’s Community Project [2005] STC 95, the courts held that the activities of both charities did not constitute a business. This was due to them not being predominantly concerned with the making of taxable supplies for a consideration when they provided nursery and crèche facilities at a fee that only covers the cost of providing the services.

More recent judgments have helped to clarify that these criteria are only indicators and they cannot replace the principles set out by the courts in determining what constitutes a business.

Decisions in recent cases

The Court of Appeal in Longridge on the Thames [2016] BVC33 emphasised that the correct test for determining whether an activity is a business activity is whether there is a direct link between the services or goods supplied and the payment received by the supplier. The ‘predominant concern’ is irrelevant. This means focusing on whether there is a direct link between the services the recipient receives and the payment made rather than on the wider context of the organisation’s charitable objectives or motive.

The court established that where an organisation is involved in a range of activities, it is appropriate to look at each activity separately and then identify which of them amount to business activity and those that do not. It would not be appropriate to settle for just an aspect of the activities by reference to their predominant concern or predominant activity. It is the nature of the activity that is to be considered and not whether the activity is predominant or not.

In Wakefield College [2018] BVC 22, the Court of Appeal considered whether the activities were business activities for VAT purposes based on a 2-stage test.

The 2-stage tests are:

Stage 1: The activity results in a supply of goods or services for consideration

This requires the existence of a legal relationship between the supplier and the recipient. The first step is to consider whether the supply is made for a consideration. An activity that does not involve the making of supplies for consideration cannot be business activity for VAT purposes.

The Court of Appeal in Wakefield emphasised that a ‘supply for consideration’ is a necessary condition but not a sufficient condition for an ‘economic activity’.

Stage 2: The supply is made for the purpose of obtaining income therefrom (remuneration)

Where there is a direct or sufficient ‘link’ between the supplies made and the payments given, the activity is regarded as economic. The Court in Wakefield College [2018] made a distinction between consideration and remuneration. Simply because a payment is received for a service provided does not itself mean that the activity is economic. For an activity to be regarded as economic it must be carried out for the purpose of obtaining income (remuneration) even if the charge is below cost.

Changes to HMRC’s Policy

HMRC’s long-standing policy has been that a business activity is possible even in the absence of a profit motive.

In light of the recent cases, as set out in this brief, HMRC will no longer apply the business test based on the 6 indicators from Lord Fisher and Morrison’s Academy in determining whether an activity is business.

The 2-stage test given in this brief, is the approach that should be taken in determining whether an activity constitutes a business activity.

Businesses can no longer rely on the old ‘business test’ to decide whether an activity is business or not, but it can be used as a set of tools designed to help identify those factors which should be considered.

Further information

More information can be found in VAT Business/Non-Business Manual which is published on gov.uk website.