HMRC have published Revenue & Customs Brief 10 (2022) 'VAT - business and non-business activities' confirming the updated approach to establishing whether an activity is a business activity or not, following the case of Wakefield College v HMRC  EWCA Civ 952.
Historically, the six tests as set out in Lord Fisher  STC 238 and Morrison's Academy Boarding Houses Association , have been used to assess whether an activity is a business activity and therefore may be a taxable supply for VAT purposes.
The tests covered a range of issues from frequency, size of activity and intent to make a profit.
In 2016 the Court of Appeal in Longridge on the Thames  EWCA Civ 930 emphasised that:
- the correct test for determining whether an activity is a business activity is whether there is a direct link between the services or goods supplied and the payment received by the supplier and
- where an organisation is involved in a range of activities, it is appropriate to look at each activity separately and identify which of them amount to business activity and which do not.
In 2018, the Court of Appeal ruled on this subject again in Wakefield College v HMRC  EWCA Civ 952 and used a two-stage test to assess the nature of the activities in question. This test will now be used by HMRC going forward and the six tests previously used will no longer apply.
This is especially relevant for businesses that are:
- a charitable organisation.
- a non-profit making organisation.
- providing nursery and crèche facilities.
- receiving grants or subsidies.
- any organisation or business carrying out non-business activities.
The brief states that in determining whether an activity is a business activity, there should be no reliance on an organisation’s overall objective or profit motive.
The test is as follows:
Stage 1: The activity results in a supply of goods or services for consideration.
- This is not sufficient on its own to constitute a business activity but is a necessary requirement.
- This requires a legal relationship between supplier and recipient.
- If there is no consideration, there is no supply subject to VAT and no business activity for VAT purposes. Stage 2 does not need to be considered.
Stage 2: The supply is made for the purpose of obtaining income therefrom (remuneration).
- Consideration and remuneration (income) are not the same. HMRC's guidance suggests further useful tests to determine whether the purpose of the supply was to obtain income:
- Is creating income a purpose of the consideration? Consideration may be for other reasons such as a notional charge to create a contract.
- Could the supply be a concession? If the consideration is much lower than the supply value, it could be a concession.
- HMRC's guidance also lists tests similar to the six tests previously used, to assist in establishing Stage 2.
Useful guides on this topic
Starting in business: VAT
One of the first decisions to make when starting in business is whether or not you should register for VAT. Am I running a business for VAT purposes and if yes, when do I register?
Registering for VAT
When should a business register for and charge VAT? What are the VAT registration thresholds? What penalties might HMRC issue for late notification of registration? When do you need to file a VAT return?
Partly funded courses are a business for VAT
In Wakefield College v HMRC  EWCA Civ 952, the Court of Appeal decided that income from students who are partly subsidised and pay a small additional fee for courses, amounted to a business activity. This meant the construction of a new building could not be zero-rated.