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HMRC changes to what determines business activity

HMRC’s longstanding policy that a business activity is possible even in the absence of a profit motive has changed.

HMRC changes to what determines business activity
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A brief was published this week to explain 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.

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.

The previous criteria for “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?
  • 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 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?

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

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

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

There is now a two-stage test that 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 that should be considered.

The two-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.

More information can be found in VAT Business/Non-Business Manual.

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