VAT Consultant
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What is business activity?

1st Nov 2021
VAT Consultant
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This is an often-asked question in relation to VAT. Where a person, whether an individual or limited company, for example, is engaged in a business activity, he can apply to be registered for VAT and recover input tax. If he is not engaged in a business activity, registration is denied and he cannot recover input tax.

In the Babylon Farms Ltd First Tier and Upper Tier decisions, HMRC had used the familiar ‘Lord Fisher’ criteria to determine that the taxpayer was not in business.  These criteria are still found in HMRC guidance at VBNB22000.  The FTT (para 18 of its decision) had apparently relied on this decision alone. The Upper Tier criticised both the FTT and HMRC on this point. There has been more recent case law which has meant that Lord Fisher is no longer the main precedent on the issue (para 49 of the Upper Tier decision).

The Upper Tier emphasized the two-stage process in the ECJ case of Geemente Borsele v Staatssecretaris van Financiën, Staatssecretaris van Financiën v Geemente Borsele (Case C-520/14) [2016] STC 1570, or Borsele. This process considers just two matters:

  • The presence of a supply for consideration; and
  • Whether the activity was carried on for the purpose of obtaining income on a continuing basis.

The Upper Tier went on to consider the UK cases of Wakefield College and Longridge on the Thames, as well as the ECJ judgment in Finland.

In applying the facts before it, the Upper Tier commented on the very relaxed arrangement between supplier and customer:

(1) Babylon raised no invoices for payment and no payment for the hay was made for a number of years “until payment was identified as being relevant to [HMRC’s] view of the input tax claimed by [Babylon].”

(2) There was no evidence that Babylon maintained any insurance in respect of its activities.

(3) Babylon had only one customer, and its income during the relevant period was only £440 per annum.

The Upper Tier stated that the FTT had misled itself on its reliance on Lord Fisher, to the exclusion of later precedents (para 53).  Rather than remit the case to the FTT, the Upper Tier decide to remake the decision. It reached the same conclusion as the FTT, that Babylon Farms Ltd was not carrying on a business; therefore HMRC were correct to reject its application for registration for VAT.

This is the Upper Tier decision:

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