United Kingdom: HMRC VAT Policy Paper – Business and non-business activities
HMRC clarifies approaches used in declaring activities as VAT-exempt or not. Nursery supplies are considered VAT-exempt for the reason that they only cover costs, and no economic activity takes place.
Recent case decisions
In Longridge on the Thames [2016] BVC33, the Court of Appeal emphasized that the right criteria for evaluating whether an activity is a commercial activity or not should be the direct relationship between the services or commodities provided and the cash received by the supplier.
Lord Fisher [1981] STC 238 and Morrison’s Academy Boarding Houses Association [1978] (‘Morrison’s Academy’) criteria have historically been used to determine if an activity is commercial or economic for VAT purposes.
The ‘business test’ criteria that resulted from both cases are as follows:
- Is the activity a serious endeavor that is being followed with zeal?
- The employment or activity that is actively pursued with reasonable or discernible
- Is the activity of a substance measured in terms of the quarterly or yearly value of taxable supply?
- The activity is carried out on a regular basis and in accordance with sound and recognized business principles.
- The activity that is primarily involved with the production of taxable goods for a fee.
- Are taxable supplies of a type that, subject to variances in detail, are regularly made by people seeking to benefit from them?
The courts ruled in Yarburgh Children’s Trust [2002] STC 207 and St Paul’s Community Project [2005] STC 95 that neither charity’s operations constituted a company. This was because they were not primarily concerned with producing taxable supplies for a consideration when they supplied nursery and crèche facilities for a price that simply covered the expense of delivering the services.
The decisions have helped to highlight that these criteria are simply indications and cannot be used in place of the rules established by the courts in deciding what defines a company.
Source: gov.uk
