Back to all posts


VAT update from HMRC – The business versus non-business test

Is an activity a business activity for VAT purposes?

24 Jun 2022

HM Revenue and Customs have released an updated brief in respect of determining whether an activity is a business activity for VAT purposes.

Recent court cases have provided further clarification on how to determine whether or not an activity is a business activity.

If you are a charity, non-profit making organisation, business providing nursery or creche facilities, business receiving grants or subsidies or an organisation or business carrying out non-business activities then you could be affected by this notice.

Historically there a set of 6 criteria to determine whether an activity was business or not, which comes from case law back in 1978 and 1981. Recent judgements have clarified that these 6 criteria are only indicators and they do not replace the principles as set out by the courts as to what constitutes a business.

Recent case law in 2018 outlined a 2 stage test, which HMRC have now adopted as the agreed approach to determining whether an activity constitutes a business activity. The business can no longer rely on the old 6 criteria test but it can be used as a set of tools to help identify the factors to consider.

The new 2 stage test

Stage 1 – the activity results in a supply of goods or services for consideration

This requires a legal relationship between the supplier and the recipient. Firstly we identify if a supply is being made for a consideration. An activity that does not involve the making of supplies for consideration cannot be a business activity for VAT.

Stage 2 – the supply is made for the purpose of obtaining income (remuneration)

Where there is a direct or sufficient ‘link’ between the supplies made and the payments given, the activity is regarded as economic. Consideration and remuneration were distinguished in the 2018 court case, such that simply because a payment is made for a service 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 (remuneration) even if the charge is below the cost.

Previously, HMRC had accepted that where a business supplies nursery and creche facilities for a consideration that is fixed at a level designed only to cover the costs then it would not be a business activity. Under the new tests this would not necessarily be the case.

If you need to review your activities to determine whether they continue to class as non-business, or to confirm they are business, then our team are happy to help with the analysis.

If you require more advice, please do not hesitate to contact us.

Related content