Case law on the VAT business test

NB: This page is in the process of being updated. Please also check the VAT case law tracker for more recent updates.

There is extensive case law on the business test, both in the UK and European courts. The following indicators, as summarised by Ralph Gibson J in Customs and Excise Commissioners v Lord Fisher [1981] STC 238 at 245, are regarded by HMRC as a guide as to whether or not an activity is ‘business’. The absence of one indicator does not necessarily mean that the activity fails to qualify as business:

  • is the activity a ‘serious undertaking earnestly pursued’ or a ‘serious occupation not necessarily confined to commercial or profit making undertakings’?
  • is the activity an occupation or function actively pursued with reasonable or recognisable continuity?
  • does the activity have a certain measure of substance as measured by the quarterly or annual value of 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 to consumers for a consideration?
  • are taxable supplies that are being made of a kind which, subject to differences of detail, are commonly made by those who seek to profit from them?

In Customs and Excise Commissioners v Morrison’s Academy Boarding Houses Association [1978] STC 1 a charge for accommodation was being made by a charity on the basis of cost recovery (i.e. not with the intention of making either a surplus or a loss). The Inner House of the Court of Session ruled that this constituted a business activity for VAT purposes. The court commented that: ‘the natural meaning of the word ‘business’ does not require that what is done must be done commercially….or with the object of making profits’.

In Wellcome Trust Ltd v Customs and Excise Commissioners [1996] EUECJ C-155/94 (20 June 1996) it was held that buying and selling investments is not of itself a business activity. The court found that Wellcome was managing investments in the same way as a private investor as it was itself prohibited from engaging in trading in investments.

Yarburgh Children’s Trust v Customs and Excise Commissioners [2002] EWHC 2201 (29 November 2001) and Customs & Excise v St Paul’s Community Project Ltd [2004] EWHC 2490 (Ch) (05 November 2004) both concerned whether or not the charity in question was carrying out activities that were non-business for VAT purposes and therefore whether the construction services that they were purchasing could qualify for zero rating. HMRC contended that the charities were in business because they were making a charge to users, albeit not at a commercial level but enough to top up their charitable income. The High Court decided in both cases that this did not amount to a business activity because the taxpayers were not predominantly concerned with the making of taxable supplies to consumers for consideration. Therefore, the expenditure was for non-business purposes (‘relevant charitable purpose’) and could qualify for zero rating.

Quarriers v Revenue & Customs [2008] UKVAT V20660 (25 April 2008) considered whether the charity could qualify for zero rating on the purchase of construction services in order to build a new epilepsy centre. The charity received approximately 93 per cent of its funding to carry out its primary purpose activity (i.e. assisting people with epilepsy) from local authority contracts and central government funding and used its own charitable donation income to meet the deficit. HMRC held the view that Quarriers was carrying out a business activity because the services were provided in return for the funding. The Tribunal concluded, however, that the services were provided on the basis of need and that there was no link between the costs of providing the service and payment of the funding. The construction costs for the centre therefore qualified for the zero rate.

There have been three other more recent noteworthy cases that consider the question of non-business activities for the purposes of securing construction and buildings at the zero rate of VAT (i.e. Commissioners for HM Revenue and Customs and Longridge on Thames [2014] UKUT 0504 (TCC), Capernwray Missionary Fellowship [2014] UKFTT 626 (TC) and Wakefield College [2013] UKFTT 731 (TC)).

Longridge was a charity based on the Thames near Marlow, Bucks. It specialised in providing water sport activities for young people. The charity commissioned the construction of a new building and was of the opinion that the building qualified for the zero rate, being a new building intended solely for a Relevant Charitable Purpose (RCP). HMRC did not agree, arguing that the building would be used to generate revenue on a regular basis (i.e. a business activity). Longridge charged fees for its activities, but these were heavily subsidised by donations. Longridge relied on this donation income and also on the support of volunteers which, in effect, subsidised the costs of its operations. Therefore, because the charging of fees by Longridge was ancillary to its main charitable aims and objectives, it was held that the building would be used for non-business purposes. HMRC appealed the decision to the Upper Tribunal, and Longridge was again successful. HMRC has appealed the decision to the Court of Appeal.

Longridge can be contrasted with a case on similar facts, Capernwray, about a missionary foundation that built a conference hall from which it ran residential courses. The fees for these courses were set at a rate to recover costs. Like Longridge, Capernwray relied on volunteers and donations. The First Tier Tribunal found that the provision of religious worship even when supported by the contributions of those attending is not an economic activity. However, because the charity provides (in return for payment) living and sleeping accommodation, food, other activities, and Bible teaching founded on ‘traditional’ principles, it was carrying out an economic activity and the building did not qualify for zero rating. The key reason for this decision was the application by the Tribunal of the Lord Fisher tests.

In Wakefield College, the Upper Tribunal decided (as supported by the case Commission v Finland [C-246/08]), that the level of fees paid by part-paying students were calculated by reference to variables relating to the situation of the students and that, therefore, the link between the part-payments and the services provided by the college was not sufficiently direct for those payments to amount to consideration for the supply of education. Consequently, the Upper Tribunal took the view that the supplies of services to part-paying students should not be included in any calculation of ‘business’ use for the purpose of determining whether or not the zero rate was applicable to building supplies received solely for relevant charitable (non-business) purposes.

The concept of business has also been recently considered in relation to two non-charitable holding companies. These companies charged their respective subsidiary companies for the provision of a number of support services cases (African Consolidated Resources plc (TC 03705), and Norseman Gold (TCO 3098)).

The issue in question was how the subsidiaries would pay for these services and whether or not the basis for paying ‘consideration’ was sufficiently commercial to be a business activity for VAT purposes. Africa Consolidated Resources Plc provided management services to its subsidiary companies, and the subsidiaries benefited from these. It was accepted that the activities qualified as economic activities for VAT purposes. However, the fee payable by the subsidiaries for these services was a fixed fee arrangement based on what the subsidiaries could afford, with no clear link between the consideration payable and the services supplied. Therefore, on that basis the supply could not be a taxable supply made in the course of business.

In Norseman Gold, the other holding company case, the Tribunal held that the holding company was providing genuine support services and supplies to its subsidiaries. However, although it was intended that fees would be paid by the subsidiaries to Norseman some time in the future, the arrangements were regarded as vague and unspecified. Therefore, the basis for making payment was not sufficiently commercial and could not be regarded as being consideration for a taxable supply made in the course of business.

HMRC maintains a summary of ongoing VAT appeals here and its own review of case law on the business test.

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