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What is a business for VAT purposes?

What is a business for VAT purposes?

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What is a business for VAT purposes? 

My client is registered for VAT despite being well below the threshold. He sells to the general public and my advice would normally be to deregister so that he doesn't have to pay VAT on his sales.

However, his business has been so poor over a period of years that he always gets a VAT refund. He appears to sell nearly everything at a gross loss.

He's always trying something new but it never seams to work!

My concern is that HMRC  would not regard this as a business but I cannot see anything in the guidance that suggests poor business acumen is a criterea that would use to deregister a client (or prevent them registering).

I extracted this from the Guidance -

"What is business for VAT purposes?

You can only register for VAT if you're in business. HMRC defines a business as a continuing activity involving getting paid for providing goods or services - in money or another form of payment such as in-kind or barter.

You are in business when, for example:

  • you earn an income by carrying on a trade, vocation or profession - by being self-employed or through another entity such as a limited company
  • you provide membership benefits as a club, association or similar body in return for a subscription or other form of payment
  • you provide certain other activities as a club or other recreational body, charity or other non-profit making body
  • you charge admission to a premises

To be in business, these activities must have a degree of frequency and scale and be continued over a period of time.

Even if your activities have some or all the characteristics of a business, they may not be considered a business for VAT purposes if they are essentially a recreation or hobby, or an isolated transaction. So if you only make occasional VAT taxable supplies, or your supplies are minimal, it may be that you don't need to register for VAT. The one-off or infrequent sale of your personal belongings at a car boot sale or auction, for example, would fall into this category - but buying goods for resale on a regular basis is definitely a business activity."

Any suggestions?


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18th Jan 2012 14:40

Have you done a projection?

If he charged the same price for his goods after de-registering for VAT (i.e. essentially a 20% uplift, less input VAT costs) would he be making a profit?

It sounds like your client is put money into a black hole, it certainly doesn't sound like a viable business. How long has this been going on? If it is for several years then HMRC would have a point if they were to describe this as "not a genuine business".

Is there any rationale for him doing this?

[UPDATE] - As per Euan below, I was under the impression that a business which made no profits over a 7-year period would be effectively treated by HMRC as 'not a real business' and would refuse to allow further losses to be recognized / offset. Can't remember the exact chapter-and-verse though.

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18th Jan 2012 11:04


I don't know if there is any legal basis, but I have always understood that farmers must make a profit once every 7 years to avoid HMRC treating the farming "trade" as a hobby and disallowing any set off of the farming losses against other income.

Has your client ever made a profit?

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18th Jan 2012 12:05

For VAT purposes

It has been held that a business is not defined by reference to profit (or loss, or break-even). VAT is not a tax on profits, but a tax on supplies made in the furtherance of a business. Having said that, absence of profit motive may nevertheless be taken into account in establishing whether or not there is a an underlying business - regardless of actual results.

And if you look at the EC definition of a taxable person - "any person who, independently, carries out in any place any economic activity, whatever the purpose or results of that activity."

It might be helpful to know exactly what the client's 'business' is.

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18th Jan 2012 13:32

Worrying about the wrong tax

I would be more concerned with incomes taxes if I were you. Even if you have satisfied yourself as to how exactly he has been funding trading losses over several years then HMRC may decide to try to limit the loss relief available especially if offset against other income.

I am not generally one to start the Money Laundering hue & cry but making gross losses over a sustained period is unusual.

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19th Jan 2012 15:26

Further info

Thanks for the responses so far.

The "business" has never made a profit.

The losses have been for at least the last 5 years. I don't think a profit has ever been made.

The losses have all been carried forward. There has been no sideways loss relief.

There are effectively a variety of businesses - he has stock of clothes, some jet skis (!!) and even a few cars (sounds worse now doesn't it!). 

He'd still be making losses even if he were not VAT registered and his selling price was the same.

From the responses so far I think my concerns are shared!

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19th Jan 2012 16:02


Why would anyone in their right mind continue to sell such items and consistently make a loss?

What has he been living on for the last 5 years (if no sideways relief I can only assume that he has no other income)?

Whilst there may be no doubting the losses on the items identified, are you satisfied that there are not undisclosed sales of more profitable items?

Sorry, but something is not adding up here.

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31st Oct 2012 16:31

Taxable or not

Four professional student friends have agreed to provide a one-off service over a short period of time for payment. Each friend receiving approximately £900. Would you advise that they declare it as taxable income, less expenses? Or would you consider this is not a bsuiness activity: it's one-off - there's no ongoing sales - but they may make a profit.

If so, could they offest the cost of their directly-related student fees against the income?


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