In Revenue and Customs Brief 10 (2022) HMRC explains changes to its long-standing policy following recent cases. This is particularly relevant for charities, non-profit making organisations, businesses providing nursery or crèche facilities, businesses in receipt of grants or subsidies, and business or organisations carrying out non-business activities.

HMRC’s previous policy was that a business activity is possible even in the absence of a profit motive. However, following the recent cases of Longridge on the Thames [2016] EWCA Civ 930 and Wakefield College [2018] EWCA Civ 952, HMRC will no longer apply the “business test” based on the six indicators from the historic cases of Lord Fisher [1981] 2 All ER 147 and Morrison’s Academy Boarding Houses Association 1977 SC 279 when determining whether an activity is a business.

In future, a new two-stage test should be taken to determine whether an activity constitutes a business activity. 

Two-stage approach

Stage 1: The activity results in a supply of goods or services for consideration.

This requires the existence of a legal relationship between the supplier and the recipient. The first step is to consider whether the supply is made for a consideration. An activity that does not involve the making of supplies for consideration cannot be business activity for VAT purposes.

The Court of Appeal in Wakefield College emphasised that a “supply for consideration” is a necessary condition but not a sufficient condition for an “economic activity”.

Stage 2: The supply is made for the purpose of obtaining income therefrom (remuneration)

Where there is a direct or sufficient “link” between the supplies made and the payments given, the activity is regarded as economic. The Court in Wakefield College made a distinction between consideration and remuneration. 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 even if the charge is below cost.

Business test

The six criteria that emerged from the historic cases, known as the “business test”, were:

• Is the activity a serious undertaking earnestly pursued?
• Is the activity an occupation or function that is actively 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 which, subject to differences of detail, are commonly made by those who seek to profit from them?

HMRC is now saying that businesses can no longer rely on the old “business test” to decide whether an activity is business or not. However, the business test can still be used as a set of tools designed to help identify those factors which should be considered.