Rickie Lowery explains how HMRC’s approach to business and non-business activities for VAT purposes has recently changed.
For an entity to be entitled or required to register for VAT, it must be making taxable business supplies. Whether a supply is taxable can hopefully be established by reference to the VAT legislation (VATA 1994, Schs 7A, 8 and 9).
But even if a supply is found to be taxable, it must also be a business supply or it does not count for these purposes and VAT cannot be charged on it. More importantly, the VAT on expenses relating to a non-business supply is always irrecoverable.
The Lord Fisher case
Historically, Customs and Excise Commissioners v Lord Fisher [1981] 2 All ER 147 was often used to determine whether a supply was business or non-business. The outcome of this case was that factors such as the predominant concern of the entity, whether there was some level of continuity to the activity and whether it was conducted on sound business principles had to be considered.
However, HMRC is increasingly disregarding this test and instead considering other factors in its place.
Direct links
A Court of Appeal (CoA) case, Longridge On the Thames v Revenue and Customs [2016] EWCA Civ 930, put much more emphasis on whether there was a direct link between the supply of goods or services and the consideration received. Where such a direct link existed, the supply could be said to be an economic (business) activity.
Further, the CoA held that consideration in this context was the amount paid for the supply; whether this amount was above, below or exactly at market value was irrelevant, it remained consideration.
Finally, the CoA commented on the ‘predominant concern’ aspect of the Fisher test, specifically that it was irrelevant. Instead, they felt each activity carried out by the entity should be considered separately to establish which, if any, amounted to business activities.
This was all unfortunate for Longridge on the Thames, as they were therefore found to be carrying out a business activity. This meant that the construction of a training centre could not be zero-rated, costing them around £135,000 in VAT.
Two-stage test
A later CoA case, Wakefield College v Revenue and Customs [2018] EWCA Civ 952, decided that a two-stage test was required to establish whether an activity is a business or non-business activity:
Stage 1: Is there a legal relationship between the supplier and the recipient which results in consideration being paid by the recipient to the supplier?
Stage 2: If so, was the supply made for the purpose of obtaining remuneration, regardless of whether this was loss-making or profitable?
The CoA here interpreted ‘consideration’ as in the Longridge case and ‘remuneration’ to represent receiving income on a more continuous basis. By this logic, receiving ‘consideration’ did not, therefore, necessarily lead to a business activity having taken place.
As for Longridge, the CoA found in favour of HMRC, and Wakefield College had to pay VAT on the construction of a new building.
The times, they are a-changing
HMRC has confirmed via Business Brief 10 (2022) that in light of these cases, it will no longer be using the criteria set out by the Fisher case, instead using the two-stage test as per Wakefield College.
This could potentially affect any entities with potential non-business activities and especially charitable or not-for-profit organisations.
While the points from the Fisher case can no longer be relied upon to demonstrate a business activity, they can, however, still be used to help identify the relevant factors which should be considered.
Practical tip
For anyone who has previously relied upon the Fisher test, it would be prudent to reconsider their position in light of the two-stage test in Business Brief 10 (2022).
