HMRC VAT Policy Change – Business/ Non-Business Activities
Following recent cases in the Court of Appeal of Longridge on the Thames and Wakefield College, HMRC have issued a new policy paper (Revenue and Customs Brief 10 (2022)) setting out a new 2-stage test in determining whether an activity is either business or non-business.
This is important because it may mean that activities previously regarded as non-business – and so outside the scope of VAT – are now, according to HMRC, business and so within the VAT system. This could mean that revenues are subject to VAT, which could lead to amounts being lost from income or an additional cost to customers. It is also possible that income now falling within the ‘business’ category might qualify for exemption, although that will very much depend on what exactly is being supplied. In addition, any change this policy brings about may well have an impact on an organisation’s overall VAT recovery on expenditure.
We set out more detail below but would suggest that Organisations need to consider how they may be affected by the policy change. It should be noted that HMRC has not specifically stated any effective date of change in its Brief, though one may assume it is from the publication date of 1 June 2022.
This policy change will be of particular interest to:
- Non-profit making organisations
- Entities providing nursery and crèche facilities
- Entities receiving grants or subsidies
- Entities carrying out non-business activities
Specifically, for entities providing nursery and crèche facilities, HMRC had previously accepted that where a Charity provides such services for a consideration that is fixed at a level designed to cover costs only, that it would be doing so for non-business purposes. It now appears that HMRC is departing from this policy, however, at the time of writing, HMRC is yet to reflect any change in its guidance.
The Old Business Test
The principles of the old business test were set out in the court cases of Lord Fisher and Morrison’s Academy Boarding Houses Association and, up until now, were used in determining if an activity was by way of business or not. The test considered the following 6 criteria:
- 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?
HMRC states that businesses can no longer rely on the old ‘business test’ in deciding whether an activity is business or not.
The New Business Test
This new test which HMRC insist now must be used is a two stage test and is as follows:
1. Does the activity result in a supply of goods or services for a consideration?
It must require the existence of a legal relationship between the supplier and the recipient and consider if the supplies of goods or services are made with the expectation of consideration from the recipient (money usually, but can also be goods or services in return). An activity that does not involve the making of supplies for consideration cannot be a business activity for VAT purposes.
2. Is the supply made for the purpose of obtaining income?
Whilst there must be a supply for consideration, the Court of Appeal made clear that the activity must also be carried out for the purpose of obtaining income.
HMRC acknowledges that, in certain circumstances, there may be difficulty in deciding if an activity is for the purpose of obtaining income and has provided some factors that can be used (as a set of tools, not a checklist) in considering this point, as follows:
Is the purpose of the consideration to create income?
This should be clear in most cases, but the purpose could be for other reasons such as a notional charge to create a binding contract.
Is there an intention to make a profit?
Such an intention is a strong indicator that an activity is for the purpose of generating income, but this is not to say that supplies leading to losses are not for such a purpose.
Is the payment so low as to be a concession?
For example, if the consideration received is much lower than the actual value of the supply. This may indicate that the activity is not the purpose of obtaining income.
Is the activity conducted based on sound business principles?
Consideration should be given as to if the activity is pursued with recognisable continuity and the level of seriousness, preparations and investment to promote the activity.
What is the scale of the activity?
For example, is the activity intended to generate £10 a week or £10,000 a week? The former is less likely to be for the purpose of generating income.
The extent to which HMRC will seek to apply its new policy (and from what date) to those organisations that have historically relied on the old test remains to be seen. However, we anticipate HMRC placing more emphasis on the purpose of activities when inspecting VAT records.
We understand that the current guidance issued by HMRC is limited and therefore expect some organisations will have difficulty in drawing their own conclusions on how they may be affected by the change in policy. We would be happy to help in advising how HMRC’s new policy may affect your organisation and can also assist in direct conversations with HMRC if necessary. Contact us here.
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