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HMRC have issued a Business Brief setting out their updated policy for distinguishing between business and non-business activities. This distinction can have a number of implications and the effect of any change in policy should be considered by any business or not for profit entity where their activities could be borderline between business or non-business.

The change in policy, or its interpretation, could mean that VAT should be charged on income, may prevent recovery of VAT on costs incurred or could affect the status of any certificates signed to claim zero rating on construction services.

VAT on income

Services supplied by charities for which a contribution to costs is requested may now be deemed to be business activity with VAT chargeable on that income, even if the remuneration does not cover the costs incurred.

Zero rating relief claimed

Charities are able to claim relief from VAT on construction costs if the building will be used for non-business purposes. A broadening of the definition of business activities could render a certificate incorrect.

VAT recovery

To give rise to VAT recovery, costs must have been incurred for the purpose of making taxable business supplies, so any activity now deemed to be non-business does not benefit from VAT recovery.



The Brief is set out as a change of policy, but does not set a date from which the new policy applies. For a charity who has issued a zero rating certificate for construction services, does that mean that the relief applies so long as the activities were non-business when the certificate was issued, or if the work is ongoing, do they need to revisit whether the project qualifies? The brief does not make this clear. One would have to assume it is applicable from its issue date of 1 June 2022.

What’s changed in HMRC’s Definition of Business?

Historically, HMRC applied a set of tests, derived from the Lord Fisher and Morrison’s Academy cases. There are six questions as set out below, the application of these tests have enabled activities undertaken in return for a contribution to costs to be treated as non-business and therefore not have VAT charged on them. More recently a case involving an outdoor activity centre, Longridge on the Thames, looked at whether there was a direct link between the services supplied and the payment received.

Old tests

  • is the activity a serious undertaking earnestly pursued
  • is the activity an occupation or function that is actively pursued with a reasonable or recognisable continuity
  • does the activity have a certain measure of substance in terms of the quarterly or annual value of the taxable supplies made
  • is the activity conducted in a regular manner and on sound and recognised business principles
  • is the activity predominantly 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 in detail, are commonly made by those who seek to profit from them

In numerous cases these tests resulted in the courts finding that the activities did not constitute a business as the predominant purpose was not making supplies for a consideration. Such was the case when a charity provided nursery facilities at a fee that was set at a level where it only covered costs incurred.

Following recent cases, HMRC believe that it is more appropriate to apply a two stage test:

Stage 1: The activity results in a supply of goods or services for a consideration
Stage 2: The supply is made for the purpose of obtaining income therefrom (remuneration)

The brief concludes that there must be direct or sufficient link between the supplies made and payment received for there to be an economic activity. The purpose of the activity must be to receive the remuneration, otherwise it is not business. Whilst the brief says that the two stage test should be applied going forward, it also states that the old Lord Fisher tests can be used as part of the decision making process.

Action required

  • Anyone with income which they believe to be non-business should check that this is still appropriate
  • Not for Profit entities and charities should review their business activities to determine if they are affected by this change and the impact this may have on the recoverability of VAT on costs
  • Any Not for Profit entity which has claimed zero rating relief on construction services must check that its activities still give eligibility for that relief.
  • The uncertainty about applicable dates should be considered and if necessary further advice taken.
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