HMRC has recently published a brief detailing how it now determines what constitutes a business activity for VAT purposes. This briefing note is useful for not-for-profit organisations/charities and explains what test a taxpayer should adopt to work out whether their supplies are business or non-business.
It is important to understand what constitutes business, as it can have an effect on whether VAT registration is required and whether input VAT can be recovered, alongside other impacts. Once a business supply is determined, you can then start to look at the VAT liability.
In their previous brief concerning business activity, HMRC used to rely on outdated case law which applied an incorrect test. The two cases relied on were Morrison’s Academy Boarding Houses Association  STC 1 and Lord Fisher  STC 218. If this isn’t your first time looking into what constitutes a business activity, then you may be familiar with the six criteria from Lord Fisher. Within that criteria, it was legitimate to consider an organisation's overall objectives or profit motives in determining whether an activity was business. Hence, some charities were able to argue that because they did not operate for profit and they were charitable, their activities were non-business. However, such factors are no longer relevant.
As is clear from the superseding case law, in Wakefield College  EWCA Civ 952 and Longridge on the Thames  EWCA Civ 930, we can now rely on a simplified two-stage test;
The activity results in a supply of goods or services for consideration (consideration):
This requires the existence of a legal relationship between the supplier and the recipient. A supply for consideration is a necessary condition but is not in itself enough to demonstrate a business activity.
The supply is made for the purposes of obtaining income from it (remuneration):
This requires a sufficient link between the supplies made and the payments received, in order for the activity to be regarded as business.
HMRC will now be applying the two-stage test, given in Revenue & Customs Brief 10 : VAT, to determine whether or not something constitutes a business activity.
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