An Important VAT Development for Businesses and Private Clients
15 June 2022
What has happened?
HMRC issued Revenue and Customs Brief (‘RCB’) 10 (2022) which confirms HMRC’s change in policy and outlines the new tests that HMRC will apply to determine if an activity is a business activity for VAT purposes.
What has changed?
HMRC will no longer apply the business tests based on old VAT case law (Lord Fisher  STC 238 and Morrison’s Academy Boarding Houses Association ) in determining whether an activity is a business activity for VAT purposes.
With effect from 1 June 2022, HMRC’s decision will be based on more recent VAT case law (Longridge on the Thames  BVC33 and Wakefield College  BVC 22).
What does this mean?
With effect from 1 June 2022, the newer case law takes precedence, and HMRC will apply the following tests to determine if an activity is a business activity for VAT purposes:
- The activity results in a supply of goods or services for consideration
- The supply is made for the purpose of obtaining income therefrom (remuneration)
It is important to note that, whilst the RCB confirms the ‘Changes to HMRC’s Policy’ with effect from 1 June 2022, it also states that “businesses can no longer rely on the old ‘business test’ to decide whether an activity is business or not” - ie HMRC might apply the new tests when reviewing retrospective rulings and/or current ‘non-business’ activities.
Who is affected?
- any organisation receiving or issuing grant funding
- any organisation currently undertaking activities it considers to be ‘non-business’
- any organisation that has received a ruling/correspondence issued by HMRC confirming a ‘non-business’ activity
- any organisation undertaking an activity for no consideration, eg free admission to events
- any organisation undertaking activities which are operated at or below cost
- any organisation that has secured zero-rating on a construction project within the previous 10 years
- any organisation that considers it qualifies for zero-rating on a prospective construction project based on ‘non-business’ use, eg village hall/community building
- an organisation with fund raising activities
BDO has charity clients which have faced very recent challenges from HMRC on the business/non-business issue, and this new policy change is likely to further prioritise the issue.
What should I do?
Organisations should ensure that they understand the application of the guidance, particularly in respect of the VAT liability of activities and the impact on: 1) the right to input tax recovery; 2) business/non-business partial exemption methods; 3) previous HMRC rulings; and, 4) capital projects, eg eligibility for zero-rating in respect of (ongoing or planned) construction.