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Business or non-business activity: Important changes to VAT guidance explained

| Duncan & Toplis | 20 October 2022

Whether an activity can be classed as having a business or non-business purpose can determine whether it is subject to VAT or not.

Recently, HMRC changed its guidance for considering whether an activity is carried out for business or non-business purposes. This is likely to have an impact on charities and not-for-profit organisations that receive grants or subsidies as well as other entities that have a mix of business and “private” activities.

Among those most affected by the change are charities that provide nursery or creche facilities, particularly if they carry out activities at, or below cost, which were previously considered to be non-business.

Business and non-business activities

For VAT purposes, the distinction between the two types of activities can directly impact an organisation’s VAT position.

This is because:

  • If an activity is for the business and it would not be an exempt supply for VAT purposes, a VAT registration may be necessary and there may be a requirement to account for VAT
  • If an activity is not for business, VAT that is incurred in relation to that activity cannot be recovered

Various charity reliefs are also impacted by whether the charity carries out business or non-business activity, particularly in relation to the use of buildings.

Historically, there were six principles that would determine whether an activity should be considered for business, however, these will no longer be used by HMRC. Instead, a two-stage approach has been introduced.

The two-stage approach

The six principles which previously used to apply were introduced over many years as a result of various tribunal cases. These included, for example, whether an activity was conducted in a regular manner and on sound and recognised business principles.

Now though, decisions in more recent tribunal cases have caused HMRC to reconsider its policy.

Instead, a broader two-stage approach will be used to establish whether a business activity exists, as follows:

Stage one – Does the activity result in a supply of goods or services for consideration?

At a fundamental level, this requires there to be a legal relationship between the supplier and the recipient: If no consideration was given to the supply, the supply is not a business activity.

Additionally, if this is the only activity carried out by the entity, then it will not be eligible to register for VAT and recover any VAT incurred on its expenses.

While the two stages are new, the need for consideration to pass is a long-established principle of VAT and so this should have little impact on most organisations.

Stage two – Is the supply made for the purpose of obtaining income (remuneration)?

This is the step that is likely to have the greatest impact because it deviates from the old ‘business test’ which was used before.

Even if the consideration received is below cost, it will be considered a business activity if the purpose for carrying out the activity is to obtain income. There will no longer be a reliance on an organisation’s overall objective or profit motive; if the activity was carried out for income, it will fall within the scope of the VAT regime and be subject to VAT where taxable supplies are made.

Ensuring that VAT is paid when it is due is a legal requirement and there will be some organisations who now find activities which were previously outside the scope of VAT are now subject to the tax.

If you think this might apply to you or you would like some advice in this area, then please contact our team for professional advice and guidance.


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