HMRC revise guidance on how they determine whether an activity is business or non-business 

Additonal commentary added on 23 June 2023.  Please also see this News article dated 23 August 2022.

On 1 June, HMRC also updated the commentary on business/non business caselaw in VBNB72050 (business test) and VBNB72200 (link between supply and consideration).

***

On 1 June 2022, HMRC published Policy paper: VAT — business and non-business activities.

It says that this is relevant to:

• a charity organisation
• a non-profit making organisation
• business providing nursery and crèche facilities
• a business that receives grants or subsidies
• an organisation or a business carrying out non-business activities

The 6 business tests established in the Lord Fisher and Morrison’s Academy Boarding Houses Association will no longer be applied by HMRC.  Now HMRC are seeking to apply a 2-stage approach, based on those established in the Wakefield College, Court of Appeal case, in order to deermine if an activity is "business" (therefore potentially liable to VAT with associated VAT recovery) or "non-business".  Each activity is to be looked at separately and the two tests are:

Stage 1: The activity results in a supply of goods or services for consideration

Stage 2: The supply is made for the purpose of obtaining income therefrom (remuneration) –  it can be a charge made below cost.

HMRC have revised a number of sections of the VAT Business/Non-Business Manual, including:

• Legal history: cases about direct link between supplies and consideration
• Legal history: cases about the business test
• Clubs and associations: unrelated non-business activities
• Specific issues: VAT treatment of museums and galleries (added commentary regarding admissions)
• Apportionment of tax: agreeing an apportionment method (include comments regarding combined business non-business and partial exemption methods)
• Apportionment of tax: Different types of Apportionment methods (gives a list and quite comprehensive guidance on various methods – Income, Expenditure, Time based, Transaction Based and Fixed Apportionment methods)
• Apportionment of tax: why is apportionment of tax needed? (There is a comment in here that “The decision in Sveda does not establish a new test for deduction of VAT.”)
• VAT Business and non-business basic principles: Outside the scope income *** This is a new page*** This has commentary on Donations/Grants and includes this comment: if a grant is given for research, but any beneficial results will become the property of the person providing the grant, then the grant is consideration for the provision of the research services.
• VAT Business and non-business activities basic principles: Non-business activities *** This is a new page*** It gives a high level list of when a non-business activity is likely to arise
• VAT Business and non-business basic principles: section 94 of the VAT Act 1994 *** This is a new page*** It gives high level commentary on the categories within section 94 and says that Section 94 is not intended to be “an exhaustive description of what may or may not be considered to be a business activity”
• VAT Business and non-business basic principles: purpose of activity *** This is a new page***It provides high level analysis of business v non-business
• VBNB20200 VAT Business and non-business basic principles: The concept of ‘business’ for VAT purposes *** This is a new page*** It provides high level analysis
• VAT Business and non-business basic principles: The term ‘Business activity’ *** This is a new page*** It provides high level analysis

If you have any questions please contact Andrea.