Important change in how HM Revenue & Customs determine what is a business activity affecting charities and other organisations
Revenue & Customs Brief 10 (2022) has been issued which sets out a change in their approach to determining whether or not an activity is a business activity. The distinction between business and non-business activity is an important one. Where there is business activity VAT needs to be accounted for but where the activity is non business it falls outside the scope of VAT meaning no VAT is accounted for on the supply which also means no Input Tax can be recovered on associated costs.
This change is especially relevant to:
• non-profit making organisations
• organisations providing nursery and crèche facilities
• organisations receiving grants or subsidies
• or any organisations or businesses carrying out non-business activities
For many years HMRC used a set of six rules to determine whether an activity counted as a business one. The tests covered a range of issues such as the frequency and scope of the activity and intention to make a profit.
However, the courts have more recently used a two-stage test in determining whether a business activity exists, which HMRC has now adopted. The brief which has been issued states that in determining whether an activity is a business activity, you should not rely on an organisation’s overall objective or profit motive.
The tests now used by HMRC are:
• Stage 1:
The activity results in a supply of goods or services for consideration. Consideration usually means payment but could also be in the form of goods or services supplied.
o A legal relationship between supplier and recipient has to exist.
o You need to establish if the supply is for a consideration. If not, there is no business activity for VAT purposes.
o This is not sufficient on its own to constitute a business activity but is a necessary requirement.
• Stage 2:
The supply is made for the purpose of obtaining income therefrom (remuneration).
o Consideration and remuneration are not the same thing. HMRC's manual has a set of tools to help taxpayers decide if the purpose is to obtain income:
· Is creating income a purpose of the consideration? In some situations, payment may be for other reasons such as making a notional charge to form a legal contract.
· Is there an intention to make a profit?
· If the payment so low in comparison with the value of the supply, it could be a concession.
· There are also tests in the guidance similar to those previously used to establish business activity. These include establishing if the activity conducted based on sound business principles and what the scale of the activity is.
Both stages need to be considered.
It appears that HMRC are currently focusing their attention on cases relating to the issue of zero-rating certificates for construction projects for premises where some business activity takes place.
The change in policy has wider scope and will be of particular interest to charities and not-for-profit organisations which may have non-business activities. Where activities are undertaken without the expectation of payment, or for less than market value, HMRC could conclude that this is a non-business activity, affecting Input Tax recovery on associated costs. The position needs to be reviewed carefully.