Business vs Non-business

Generally, a supply of goods and or services made in the course or furtherance of business (which is not exempt) is subject to VAT. This VAT can either be at the standard rate, the reduced rate, or the zero rate.

‘Business’ is not specifically defined in either UK or EU law. It has a much wider application than the direct tax meaning of ‘trading.’ A charity can be carrying on a business for VAT purposes even if it is only undertaking its primary-purpose activities on a not-for-profit basis. Activities on which charities simply cover their costs or even make a loss can still be ‘business’.

Deciding whether or not an activity is ‘business’ for VAT purposes is crucial for a charity because that decision determines whether or not:

  • there is a requirement or an opportunity to register for VAT
  • there is a liability to account for VAT
  • there is an entitlement to recover VAT incurred on related expenditure (subject to partial exemption rules).

To be a ‘supply’ for VAT purposes, the activity needs to be carried out in the course or furtherance of business. ‘Business’ is also referred to as ‘economic activity’.

‘Supply’ is not defined in the legislation. It includes all forms of supply, but not anything done otherwise than for consideration. For VAT purposes consideration means everything paid to a supplier by a purchaser where there is a direct link between the goods and services received and the consideration paid for these. Note that consideration does not have to be paid in money, so a barter transaction could still be a supply.

Where taxable supplies are being made or are intended to be made, there is an entitlement to recover VAT incurred on related expenditure. VAT incurred in relation to an intended taxable supply can be recovered, but there must be evidence available to support this intention. However, VAT incurred on expenditure that directly or indirectly relates to non-business activities is not recoverable. VAT on expenditure relating to ‘exempt supplies’ is also irrecoverable subject to de minimis thresholds.

For further information charities should refer to HMRC’s VAT Business/Non-Business manual.

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