HMRC has issued new guidance: Revenue
and Customs Brief 10(2022) on how to determine if an entity carries out
business or non-business (NB) activities. This goes to the core of the tax and
establishes whether a person:
- is registerable for VAT
- charges output tax
- can recover input tax
It mainly affects charities, NFP, an organisation which receives grants or subsidies and entities which are carrying out NB activities.
Previous tests
Since 1981 previous cases (mainly Lord Fisher and Morrison’s
Academy) have set out the following business tests:
- Is
the activity a serious undertaking earnestly pursued?
- Is
the activity an occupation or function, which is actively pursued with
reasonable or recognisable continuity?
- Does
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 predominantly 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?
Changes
The guidance states that the ‘predominant concern’ is now irrelevant. The focus is 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. This is as a result of the Longbridge case.
I often think it helps if a person bears in mind here the comment in the EC case of Tolsma translated as: “…the question is whether services carried on by [a person] were carried on for the payment or simply with the payment”.
There is now a two-part test derived from the Wakefield
College Court of Appeal case.
Test One:
The activity results in a supply of goods or services for
consideration. This requires a legal relationship between the supplier and the
recipient. The initial question is whether the supply is made for a consideration.
An activity that does not involve the making of supplies for consideration is not
a business activity.
Test Two:
The supply is made for the purpose of obtaining income
therefrom (remuneration)
More on the definition of taxable supply here.
Where there is a direct or sufficient nexus between the supplies provided and the payments made, the activity is regarded as business (a taxable supply). The Wakefield case 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 business. 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.
HMRC states that although it will no longer apply the above Lord
Fisher tests, it accepts that they “can be used as a set of tools designed
to help identify those factors which should be considered.” So Lord
Fisher lives on in some form.
Further information
More detail is provided by HMRC in the updated Internal
Guidance VBNB10000
Further reading
The following articles consider case law and other relevant
business/NB issues:
Wakefield
College
Longbridge
Babylon Farm
A Shoot
Y4
Express
Lajvér
Meliorációs Nonprofit Kft. and Lajvér Csapadékvízrendezési Nonprofit Kft
Healthwatch
Hampshire CIC
Pertempts
Limited