VAT: meaning of business

HMRC has published a policy paper (Revenue & Customs Brief 10 (2022)) which explains its approach to the question whether or not an activity is a business activity for VAT purposes following recent case law developments. In particular, HMRC has confirmed that it will now adopt the two-stage test from the recent Wakefield College case, including asking the question whether supplies are made for the purposes of obtaining income from them.

Background

The term “business” is an important concept in the UK VAT legislation as, in particular, a person is only liable to register for VAT as a taxable person if they make taxable supplies in the course or furtherance of a business. However, in fact, the UK provisions in VATA 1994 derive from and give effect to the provisions of the EU VAT Directives and those directives use the term “economic activity” in this context, rather than business. The UK courts have, therefore, construed the term “business” in this context so as to conform with the EU concept of “economic activity”.

Although the UK left the EU on 31 January 2020, UK VAT provisions will generally continue to be construed in line with the EU provisions they were intended to give effect to and the historic EU case law on those concepts became “retained EU law” and continues to be relevant to the construction of those concepts.

Business or economic activity

Historically, the term business was construed in line with principles set out in the 1981 Lord Fisher case, based on six criteria. However, a series of EU cases on the meaning of “economic activity” has made it clear that these six criteria are only indicators of business and do not replace the overall principle of what amounts to a business. In particular, in 2018, the Court of Appeal in Wakefield College applied the Court of Justice decision in Borsele that an economic activity required a two-stage test:

• The activity must result in a supply of goods or services for consideration
• The supply is made for the purposes of obtaining remuneration from the activity.

As such, the Court held that the existence of a supply for consideration is a necessary but not a sufficient condition for an economic activity. The second requires a wide ranging enquiry of all the objective circumstances in which the goods or services are supplied. Business Brief 10 (2022) suggests that, “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.”

The Business Brief confirms that HMRC will no longer apply the business test based on the six indicators from the Lord Fisher case and instead apply the two-stage approach from Wakefield College. However, those indicators may “be used as a set of tools designed to help identify those factors which should be considered”.

In particular, based on these indicators, it had been held that supplies made for fees which only covered the cost of providing them, did not qualify as a business for VAT purposes. Later EU case law has made it clear that the organisation’s overall objective or profit motive is irrelevant to determining whether it is a “business” or “economic activity” for VAT purposes. Business Brief 10 (2022) confirms that this approach is the one applied by HMRC and that “a business activity is possible even in the absence of a profit motive”.

Comment

Whilst the confirmation from HMRC that it will apply the latest case law (rather than an outdated 1981 decision) is welcome, the second part of the test from Wakefield College does raise many questions. The term “remuneration” is intended to have a separate meaning to consideration, but it is not a term that is defined and is likely to give rise to difficulties and disputes. This is particularly the case in the charitable and non-for-profit sectors where businesses often receive a mix of payments, including grants and subsidies, in addition to payments by users of their services which may, or may not, be linked to the value of the services provided. It seems highly likely that further litigation will be needed to determine the boundaries of “business” following these recent developments.

This lack of clarity is particularly disappointing as the key sector affected by the distinction between non-business and business activities is the charitable and not-for-profit sector. These organisations often lack the specialist VAT experience which is likely to be required in determining this technical and fact-specific issue.

More generally, given the wide-ranging use of the term business throughout UK law, including the direct tax rules, and the confusion that this can cause with the construction of the term in the VAT context, there is a strong argument that UK legislation should adopt the more neutral EU term “economic activity”.