VAT: Are your activities ‘business’ or ‘non-business?
Charities and not-for-profit organisations are subject to the same VAT rules as any other organisation.
The main objective for a charity or not-for-profit organisation is to undertake activities that allow it to achieve its primary purpose.
While these activities will be charitable in nature, and may benefit from certain direct tax reliefs, for VAT purposes they may be deemed to be business activities which are liable to VAT.
Deciding on whether an activity is ‘business’ for VAT purposes is crucial for any non-profit making organisation because that decision determines whether:
- there is a requirement or an opportunity to register for VAT.
- there is a liability to account for VAT.
- or there is an entitlement to recover VAT incurred on expenditure.
In June this year HMRC published its updated policy on business and non-business activities following several court decisions.
Historically, HMRC applied the following six tests to determine if an activity is business:
- 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 states that businesses can no longer rely on the old six business tests in deciding whether an activity is business or not. Instead, businesses should consider the following two-stage test:
Stage 1: Does the activity result in a supply of goods or services for consideration – this requires a legal relationship between the supplier and the recipient. The first step is to decide 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.
Stage 2: Is the supply made for the purpose of obtaining income – where there is a direct or sufficient ‘link’ between the supplies made and the payments given, the activity is regarded as economic. 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.
Why does it matter?
The change of HMRC’s policy seems to have widened the scope of activities carried out by charitable organisations that may be ‘business’ in nature.
For example, HMRC had previously accepted that where a charity provides nursery and crèche facilities for a consideration that is set at a level to cover costs only, that it would be doing so for non-business purposes – while HMRC has not updated all its internal guidance, the new two stage tests appear to bring these services within their definition of business.
Charities will now need to review their activities, as the change of policy could mean that certain activities are now deemed to be ‘business activities’ and subject to VAT. It should also be noted that many activities carried out by charities could fall within several VAT exemptions – but this will depend on the nature of the supplies and each activity must be considered separately.
In addition to widening the scope of activities that fall within the VAT system, charities are likely to lose several reliefs that are available on purchases of certain goods and services for use during a charity’s non-business activities if these activities are now deemed to be business in nature.
For example, a charity may qualify for the reduced rate of VAT on fuel and power for premises used for non-business purposes or zero rating on the construction of a new building to be used solely for non-business activities.
Things to take away
- HMRC did not consult externally before its change of policy. Several charitable organisations and VAT specialists, including VAT partner Becky Hayes, are seeking further clarification from HMRC on the policy change.
- HMRC has not specifically stated any effective date in its change of policy. We could assume that it is effective from the date HMRC published the brief, but we have no guidance on whether HMRC can adopt its new policy retrospectively.
- And HMRC has not updated all its guidance in respect of its new policy, so it will cause a lot of uncertainty for many organisations.
If you would like more information or to discuss whether your activities may fall within the VAT regime, please do not hesitate to contact me or your regular point of contact at Westcotts. Our specialist charities team is also on hand to help.