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Business or non-business VAT confusion


New guidance from HMRC intended to clarify whether or not an activity amounts to a business, has only led to further confusion.

21st Jun 2022
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HMRC’s revised guidance attempts to clarify whether or not an activity amounts to a business, but it has managed to confuse the situation further. This will not be the last word on the topic.

The changes announced in this policy paper will be of interest to charities, not-for-profit organisations who are operating nurseries and crèches, although it perhaps also has a wider application.

The previous view from HMRC was that where a charity supplies nursery and crèche facilities for a fee that is fixed at a level designed to only cover its costs, this was not a business activity for VAT.

Charities and churches operating nurseries could issue a zero-rating certificate for the construction of new buildings (see Notice 708 section 14), but only if the charity “was otherwise than in the course of furtherance of business”. The importance of whether a crèche is in business or not does have a significant VAT impact for a non-VAT registered, non-business charity-operated crèche.  

Lord Fisher and Morrisons Academy Boarding Houses Association (1978) set the standard on whether an activity is “business” or “non-business”.  There were six criteria for the “business test”:

  • Is the activity a serious undertaking earnestly pursued?
  • is the activity pursued with reasonable or recognisable continuity?
  • Does 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 thah, subject to differences of detail, are commonly made by those who seek to profit from them?

Two cases of relevance are Yarburgh Children’s Trust [2002] STC 207 and St Paul’s Community Project [2005] STC 95. Both charities operating nurseries, neither were setting out to make a profit and applying the above list concluded they were non-business activities. For St Paul’s it meant a newly constructed property was correctly zero-rated (non-business relevant charitable purpose).

Revised approach

More recent cases have focused on whether there is a direct link between the services or goods supplied and the payment received. The predominant concern is irrelevant – in effect, ignore the charitable objectives or purpose, and instead ask if there is a link between what the customer receives in return for their payment.

In Wakefield College [2018], the Court of Appeal used a two-stage test to determine whether an activity was business or non-business. The two-stage tests are:

  1. Does the activity result in a supply of goods or services for consideration?
  2. Is the supply made for the purpose of obtaining income therefrom?

Stage 1 is straightforward. Stage 2 then asks is there a direct link between the service and the remuneration? Just because a payment is received for a service does not mean that the activity is economic. For an activity to be economic it must be carried out for the purpose of obtaining remuneration, even if the charge is below cost (as was the case with Yarburgh).

Confused? You will be

This guidance is terrible. It is designed to withdraw the previously held (non-business) understanding about charities operating nurseries/crèches.

The guidance is silent as to when this new approach is applicable from. Presumably from 1 June 2022 (date of publication) but such changes of approach usually come with a 12-month warning, whereas here a charity could be operating to a Yarburgh model and suddenly find itself non-compliant from the start of June.  

The absence of any mention of retrospectivity is good but charities often operate under a clawback rule – that is, if a property is constructed and zero-rated but later the property is used for a business purpose, there is clawback/adjustment of VAT, as such seen in Balhousie Holdings Ltd. So does the new guidance mean clawback will be triggered for all those charities who built new crèche facilities under the old rules?

Another issue is that the guidance concludes by stating that you can no longer use the “old” business test (Lord Fisher’s six-point approach), but that it can still be used as a set of tools to help you identify those factors that should be considered.

Does HMRC mean that when using the new two-stage approach to arrive at the answers, you still use the six-stage test as a guide to answering each of the new two-stage questions?  So more a case of use the six-stage test to answer the two-stage test, which is not the same as withdrawing the old six-stage test. The updated HMRC manuals mention the two-stage test VBNB30200, but the next page in the manual then refers to the six-stage test VBNB30300, so I think HMRC does mean for you to use both. 

Finally, what does HMRC mean by “remuneration” not being the same as consideration?  

I suspect HMRC will revise this guidance, although it has had it since 2018 (Wakefield College). The issue is that a tax adviser is not going to be any clearer as to what the VAT treatment is and as many charities operate with limited, if any, in-house expertise, only chaos can ensue.

Replies (2)

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By listerramjet
23rd Jun 2022 09:23

Given that there is settled case law then how can non-statutory "guidance" overtake it?

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By djbrown
23rd Jun 2022 09:39

I just looked at it this week and agree entirely, instead of giving helpful guidance, all they've done is muddy the waters, severely!

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