23 August 2022 
Andrea Marshall, Tax Specialist
Further to this News Article, HMRC has now updated its internal guidance on pre-school education, nurseries, after-school clubs and playgroups. Please see the revised VATEDU36900. This follows the announcement in Revenue & Customs Brief 10 (2022), published in June 2022.
HMRC will no longer be following the decisions in Yarburgh Children’s Trust [2002] STC 207 and St Paul’s Community Project [2005] STC 95, where it was decided that where a charity made charges that only covered costs of supplying nursery and crèche facilities, it was not a business activity for VAT purposes.
HMRC will now be applying the tests in Longridge on the Thames and Wakefield College. The updated guidance says:
In Longridge on the Thames, the Court of Appeal emphasised that the correct test to apply is whether there is a direct link between the services or goods supplied and the payment received by the supplier. The ‘predominant concern’ is irrelevant. This means focusing on whether there is a direct link between the services the recipient receives, and the payment made rather than on the wider context of the organisation’s charitable objectives or motive.
In Wakefield College [2018] BVC 22, the Court of Appeal considered whether the activities were business activities for VAT purposes based on a 2-stage test.
The 2-stage tests are:
Stage 1: The activity results in a supply of goods or services for consideration
This requires the existence of a legal relationship between the supplier and the recipient. The first step is to consider whether the supply is made for a consideration. An activity that does not involve the making of supplies for consideration cannot be business activity for VAT purposes.
Stage 2: The supply is made for the purpose of obtaining income therefrom (remuneration)
Simply because a payment is received for a service provided does not itself mean that the activity is economic. For an activity to be regarded as economic it must be carried out for the purpose of obtaining income (remuneration) even if the charge is below cost.
Charities who supply nursery and crèche facilities for a consideration are now required to apply the 2-stage test in VBNB30000 to determine if their services constitute business activities for VAT purpose.
For those of you with in-house nurseries, it will probably not have a major impact as the income is probably treated as exempt rather than non-business.
