HMRC have published a Brief detailing a change in approach with regards to how to determine whether a supply is a business activity for VAT purposes. Supplies made ‘in the course or furtherance of any business’ are subject to VAT, with the appropriate rate out output tax due, subject to other considerations. Consequently, any business supplies made in the UK by a VAT registered person will likely fall within the scope of UK VAT.

Furthermore, with regards to input tax recovery, this can be sought to the extent it relates to provision of taxable business supplies (subject to the normal VAT recovery rules). Therefore, it is essential for charitable/non-profit making organisations, in addition to any business carrying out non-business activities, to clarify whether supplies made constitute business supplies as this may have an effect form both an output and input VAT perspective.

Historically, organisations were to consider the 6 criteria set out in the cases of Lord Fisher [1981] STC 238 and Morrison’s Academy Boarding Houses Association [1978] when seeking to confirm whether or not an activity is a business activity.

These 6 criteria are as follows;

• 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?

However, subsequent case law has further clarified HMRC’s position in relation to this, and these 6 principles should only be treated as indicators with regards to what constitutes a business and that, in isolation, an organisations profit motive is not an acceptable indicator for determining whether an activity is a business activity.

In recent cases, such as that involving Longridge on the Thames [2016] BVC33, the courts clarified that organisations should, for the purposes of determining whether a supply is business or non-business, primarily consider “whether there is a direct link between the services or goods supplied and the payment received by the supplier”, rather than considering the context of the suppliers objective in making these supplies and consequently receiving this payment.

Further to this, in a case heard by the Court of Appeal, they clarified that a 2-stage test should be applied to establish whether activities qualified as business for VAT purposes;

Stage 1: The activity results in a supply of goods or services for consideration. Any activity provided without receipt of a consideration is non-business by definition, although the receipt of payment is not sufficient alone to evidence a business activity.

Stage 2: The supply is made for the purpose of obtaining income therefrom (remuneration). Where there is a direct link between the supplies provided and monies received, i.e., the activity is undertaken for the purposes of receiving payment, this is sufficient to classify the supply as business even in instances where the monies received are to cover the cost of making the supply, or even where the charge is below cost.

Going forward, HMRC have confirmed that the 6 criteria detailed above should not be used as a basis for determining whether an activity is business or non-business and, instead, the 2-stage test should be applied. If you or your clients make supplies that are treated as non-business and require advice with regards to the application of this new test, or wish to clarify the implications of supplies being defined as business activities, please contact our VAT team on 0161 477 6600 for a free initial consultation.