Is it a business?

For approximately 40 years, HMRC have relied upon a published set of 6 questions, derived from the historic Tribunal cases involving Lord Fisher and Morrison’s Academy Boarding Houses Association, to be asked and considered when deciding if an activity undertaken should be considered a business activity within the context of VAT. The questions were:

  • 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 supplied made?
  • Is the activity conducted in a regular manner and on sound and recognised business principles?
  • Is the activity predominantly 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?

These questions were commonly referred to as ‘The Business Test’ and were all required to be considered in relation to an activity but as not all would be relevant to all activities, any decision made would be a balanced decision based on the specific circumstances of the supply and would determine whether a supply falls within the scope of VAT and thus whether VAT applies to a supply made, whether the supplier was eligible or required to be registered for VAT and whether the supplier had a right to claim VAT it incurred in making these supplies.

Subsequent Tribunal cases clarified that a profit motive is not relevant to the question of whether an activity is a business activity and that the above ‘Business Test’ should be considered to provide only indicators of business but cannot replace the basic principles of what constitutes a business activity.

However, the more recent Court of Appeal rulings in the cases of Longbridge on the Thames and Wakefield College, has shown that the Courts consider that this matter should be considered more widely than the existing ‘Business Test’, allowing a more far-reaching interpretation of ‘business’ and should be considered objectively, taking into account the characteristics of the activity and not the persons intention, their purpose or the end result of the activity.

The UT dismissed HMRC’s appeal on all Grounds. The FTT applied the correct tests in law and was entitled to reach the conclusion it did on the evidence available to it, irrespective of whether the UT would have come to the same conclusion.

Therefore, in June 2022, HMRC issued Revenue and Customs Brief 10 (2022), see the link below.

In this Brief HMRC confirmed a wholesale change, with immediate effect, to their policy on the test to consider whether an activity is a business activity, replacing the previous 6 question test with a 2-stage test.

This new test no longer takes account of the overall objectives of the entity making the supply or its intention to make profit but instead requires 2 conditions to be met for a supply to be considered a business activity:

  1. The activity results in a supply of goods or services for consideration; &
  2. The supply is made for the purposes of obtaining income therefrom (remuneration).

The first condition requires there to be a legal relationship (whether formal or informal) between supplier and the recipient in regard to the making of the supply and that the supply is to be made with the expectation of the supplier being paid for the supply, whether that payment be in money, in kind or as barter.

The second condition requires that there be a direct link between the supply and the payment received, even if the charge and payment for the supply is below the cost of making the supply.

HMRC has yet to release updated guidance accepting the VAT treatment in line with the Upper Tribunal decision.

HMRC has also revised their guidance on the ‘business test’, providing new guidance as to how to use the new test in their online manual VBNB30200, see the link below.

On the face of it, a simple application of this change of policy and the new 2-stage test appears to increase the potential for activities that may previously not have been considered a ‘business activity’ to now be considered ‘business’ and so fall within the scope of VAT.

However, the fact that the Brief does also confirm that the old ‘Fisher/Morrison’s Academy test can continue to be used “as a set of tools designed to help identify those factors which should be considered.” may suggest that. In fact, HMRC do not consider the new 2-stage test to be applied as simply as the Brief may imply.

What is perhaps also concerning is the fact that HMRC also advise that “Businesses can no longer rely on the old ‘business test’ to decide whether an activity is business or not” but fall short of stating that that this new test only applies to supplies made from 1 June 2022 onward.

Their silence on this could indicate that they may apply the new test retrospectively when reviewing activities that previously may not have been considered a “business” under the old test.

If that were to happen it could mean that HMRC may consider that the organisations undertaking those activities must be retrospectively registered for VAT.

Such a position would certainly seem unreasonable, but reason is sometimes not relevant in HMRC’s actions and so there is no way of knowing if this would be the case unless/until HMRC clarify their position, or if the issue is tested and the outcome published.

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