As the fiftieth anniversary of VAT draws near, Simon Buchan from BHP takes a look at the latest HMRC approach to determining what is a business activity - an approach that all charities should be aware of.
On 1 April 2023, VAT celebrates its 50th birthday. Many would think that this span of time would be long enough to sort out and understand the basic principles of the tax.
However, we are still arguing over basic principles such as single and multiple supplies, what is a land transaction, what is a Transfer of a Going Concern (TOGC), and most importantly to charities, when is an activity a business activity for VAT purposes?
The question as to whether an activity is a business activity for VAT purposes has long been a bone of contention. HMRC’s traditional view has always been that if there has been a supply of goods or services for a consideration, there has been supply regardless of the level of consideration or whether the supplier has an intention to make a profit.
The Courts have often disagreed with this approach and have regularly considered a number of other factors such as the intention of the charity and whether they intended to make a profit. This approach gave rise to the business test as an aid to determining whether an activity was a business activity.
Those of you who have followed my articles or heard my comments at the BHP charity conference may recall that my view was that judgements of the Court of Appeal in the disputes between Longbridge on the Thames (2016) and Wakefield College (2018) and HMRC would further encourage HMRC that their long-held view is correct.
It has taken some time but on 1 June 2022 HMRC published a policy paper – R&C Brief 10 (2022) – to explain how they will now determine whether an activity is a business activity for VAT purposes, following on from the decisions in those cases.
According to HMRC, the Court in Longridge on the Thames emphasised that the test for determining whether an activity is a business activity is whether there is a direct link between the goods or services supplied and the payment received.
In Wakefield College, the Court considered whether there was a business activity based on a two-stage test as follows.
Stage 1: The activity results in supplying goods and services for a consideration and
Stage 2: The supply is made for the purpose of obtaining income therefrom.
HMRC’s new policy is that the business test is no longer an appropriate test to determine whether an activity is a business activity and now considers that the two-stage test applied in the Wakefield College case is the correct approach to take.
Whether this is the case, only time will tell. I suspect that this issue will still be the subject of disputes when VAT is approaching its 100th birthday.
If you wish to discuss how this may affect you, please email Simon Buchan, BHP.