5th July 2022Charity VAT Alert: Update to business v’s non business activities for VAT purposes

On 1 June 2022, HMRC published Revenue and Customs Brief 10 (2022) outlining their change of policy when determining whether an activity is a business activity for VAT purposes. Historically, HMRC have applied the principles laid down in the cases of Lord Fisher and Morrison’s Academy Boarding Houses Association to decide whether an activity is business for VAT purposes.


The six indicators that emerged from both cases, known as the ‘business test’, include:

  • is the activity a serious undertaking earnestly pursued?
  • is the activity an occupation or function that is actively pursued with reasonable or recognisable continuity?
  • is the activity have a certain measure of substance in terms of the quarterly or annual value of taxable supplies made?
  • is the activity conducted in a regular manner and on sound and recognised business principles?
  • is the activity predominately 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?


What has changed?

HMRC will no longer apply the six indicators based on the principles laid down in the aforementioned cases but they can still be used to help identify factors that indicate that an activity is a business activity. That said, HMRC will instead follow the reasoning of the Court of Appeal in Longridge on the Thames and the two-stage test that was considered by The Court of Appeal in Wakefield College. The two stage test being:


Stage 1: identifying whether a supply has been, or will be, made for consideration. A supply made for consideration is necessary for there to be a business activity. An activity that does not involve the making of supplies for consideration cannot be a business activity for VAT purposes.

Stage 2: identifying whether the purpose of making the supply is to obtain income.


In Wakefield College’s case, The Court of Appeal made a distinction between consideration and remuneration. Just because a payment is received for a service provided, it does not automatically mean that the activity is economic. For an activity to be regarded as economic, the intention must be to generate income even if loss making.


Action Needed

This is clearly a revenue raising attack on the charity sector and charities are strongly advised to review the totality of their income streams to ensure that there is no financial exposure arising from this change. It is not clear whether HMRC will seek to apply this revised position from a current date or seek to apply it retrospectively.


If you would like to discuss your specific circumstances please get in touch.

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