On 1st June HMRC published what it called a “policy paper”, incorporated within Revenue & Customs Brief 10 (2022). The subject title of the paper is “business and non-business activities”. A title of that kind suggests, not only a subject of relevance to charities, but a very meaty subject in itself.
However, the ensuing text (which was not sent to CTG for comment or review prior to publication) does not suggest a detailed or sufficiently thorough analysis. The first comment to make is that it only covers one aspect of the business/non-business subject, namely the one generally associated with scale and regularity. It does not cover the question of whether a sum of money or other valued benefit received by a charity is in consideration for a supply, or, alternatively, a grant/donation for the general good, or the receipt of a levy (as can arise with a trade body). The title should have made clear that it does not cover these aspects, whereas someone reading this policy paper could assume that it does, and could accordingly be misled into thinking that regular receipt of grants, for instance, amounted to a business activity.
But that, unfortunately, is not where the difficulties end.
One of its main apparent purposes is to withdraw a longstanding HMRC policy, which was that childcare charities, providing nursery or creche facilities, are not involved in a business activity. It certainly refers to a change of policy, rather than merely seeking to provide information as to HMRC’s existing policy, and it is welcome that they are explicit enough in saying that a change has occurred. What it does not do, however, is provide a date from which the policy will be deemed to have been changed. All we have to go on is the 1st June date attributed to the Brief’s publication. That is unfortunate. An explicit date of change would have been preferable.
This point is important. The greatest relevance of the question relating to, for example, childcare charities, is as to whether their activities allow them to issue a certificate for the construction of a new building on a zero rated basis. Ideally, one would expect there to be a date up to which such a certificate would be regarded as valid, and not open to adjustment under the “clawback” rules. We also note that, as at 13th June, the HMRC manuals page enshrining their previous policy (VATEDU36900) had not been updated to reflect the abovementioned change. It is difficult to understand why the policy paper was issued with an explicit reference to a change of policy, without updating the public guidance on the withdrawn policy.
This cannot have been done in a hurry, since the case law which led HMRC to view that policy as no longer tenable, was a Court of Appeal decision in May 2018, more than four years prior to the date of the Brief.
When we consider the wider application of the contents of the Brief, matters become less clear still. The approach HMRC appears to have taken is to quote the judge-given law aspects of Court of Appeal decisions in the last five or six years, without explaining how in practise they intend to apply them. We are told that the familiar “Lord Fisher” tests, derived from decades old case law, are no longer applicable, and they have been replaced by a two stage test adumbrated by the Court of Appeal in 2018. But we are also told, at the same time, without apparent intention to contradict, that the original Lord Fisher tests can be used to assist in working out the answer in applying the more recent two stage test. The way in which this is presented amounts to something of a contradiction. If the old Lord Fisher tests have to be applied to another two stage test, it is a simple matter to say that that is how they will be applied, rather than saying that they are no longer to be applied. This could have been clarified at the drafting stage thereby avoiding a policy publication which appears internally contradictory.
But that would not be a major problem if we could understand what is really meant by the “two stage test”. This puts forward the view that, in order for an activity to be a business, there must be, both, consideration for a supply, and, that supply must be for remuneration. So, the two stages are first to consider whether there is consideration, and then to consider whether there is remuneration. Only if both apply is there a business. That is the same as saying that something is non-business if one or more of those two tests are failed.
And that is where the help ends, since there is no definition given of “remuneration”. “Consideration”, of course, has a legal meaning (it is a ‘term of art’), but “remuneration” is a more elusive concept. How can we tell whether activities that attract consideration are also for remuneration? It is difficult to see whether HMRC knows the answer to that question, since they do not appear to attempt to answer it. Not only do we not get any examples by way of illustration of where they might draw the line, but we do not even get a textual discussion of what they mean by what they say. They say that it arises where an activity is carried out “for the purpose of obtaining income”, but that is hardly revealing when we are explicitly told that the Lord Fisher test relating to “predominant concern” is no longer applicable. What kind of purpose are they referring to when considering the rationale for an activity? It cannot be the primary purpose, because that would also be the “predominant concern”. It must mean something different to that, but we are not told what it means.
They could justify this as being a consequence of the Court of Appeal decision also not telling us what was meant by what was said. However, that is unhelpful from the point of view of understanding government policy.
One is driven to the conclusion that there continues to be an important role for the Lord Fisher tests. Out of the six tests, the one that was roundly condemned in the Longridge on Thames litigation was that of “predominant concern”. But if we look at the others, which are to do with the manner in which the activity is conducted, its scale, frequency, or regularity, comparability with activities in the market, these are central Lord Fisher concepts. If we assume that activities that are carried out “for remuneration” must have a structure and intention behind them, which bespeaks a business-like attitude, reasonable frequency and regularity, and an intended degree of permanence, we are clearly in old fashioned Lord Fisher territory. Far from this bringing Lord Fisher to an end, all it does is hack off the part of Lord Fisher which clearly failed in the more recent litigation, namely the motive test of “predominant concern”.
But that is not what the Brief actually says. It is difficult to see professional advisers being able to advise on the basis of the Brief. Even more so, is it unlikely that a charity trustee or director could draw a sensible conclusion based on this policy paper. It is likely to disincentivise the use of the charity reliefs which are dependent upon this analysis, and to increase the traffic for the already overburdened enquiries staff of HMRC in dealing with queries as to whether an activity does or does not satisfy the two stage test. It is, in short, an inadequate policy paper, which ought to be fundamentally reviewed.
CTG intends to contact HMRC policy unit to raise these points formally, in the hope of being able to secure an improved policy communication.
Graham Elliott is Technical Adviser to the Charity Tax Group