VBNB30200 - VAT Business and Non-Business: Principles: How to decide whether an activity is business for VAT purposes

As a general rule, if a person supplies goods or services for a consideration, that supply is capable of constituting a business activity, this is because there is a direct link between the services supplied and the consideration received, and the activity is carried out to obtain income on a continuing basis.

Section 94 also provides examples of activities that are likely to be business for VAT purposes.

It is not automatic that all activities carried on by a taxable person are business for VAT purposes. Where it is unclear if an activity is business or non-business, you must apply the following test and consider the factors in VBNB30300.

Wakefield College CoA [2018] BVC 22 set out a two-stage test to determine whether activities are business for VAT purposes. The CoA also distinguished between the concepts of ‘consideration’ and ‘remuneration’.

The two-stage test is:

1. Does the activity result in a supply of goods or services for consideration? This requires the existence of a legal relationship between the supplier and the recipient. The first step is to consider if there are supplies for consideration. If an activity involves the making of supplies for no consideration, then these are not supplies subject to VAT. An activity that involves making no supplies subject to VAT is not business for VAT purposes.

The CoA emphasised that a ‘supply for consideration’ is a necessary condition for there to be a business activity for VAT purposes, but not sufficient on its own. The court said that whether a transaction was a ‘supply for consideration’ should be the first question addressed in deciding whether there was a business activity, as the answer was potentially decisive for the issue of whether there was a business activity.

There are some instances where payments given in return for goods or services will not constitute consideration for a supply and therefore are not business activities within the scope of VAT. Most notably this happens when there is no link between the goods or services provided and the payment made. For example, where the supplier does not require a payment for the goods or services (Tolsma C-16/93 [1994] STC 509) or where the payment needs to be made whether or not the goods or services are provided (The Apple and Pear Development Council [1988] STC 221).

2. Is the supply made for the purpose of obtaining income?

While there must be a supply for consideration for there to be a business activity, the CoA made clear that it must also be carried out for the purpose of obtaining income, which the CoA described as remuneration and distinguished from consideration. The CoA also explained that a supply can be made for the purpose of obtaining income even if the charge made was below cost. Whether a supply is for the purposes of obtaining income is explained in VBNB30300.

Even if an activity involves supplies which are provided for consideration with the purpose of obtaining an income therefrom, an activity will not be business for VAT purposes in certain circumstances. This could be because the taxpayer did not participate in the market an example is where the supplies are provided as part of a regulatory or Governmental activity, fulfilling the functions of the state, for example issuing licences to operate mobile phone services (Case C-369/04 Hutchinson 3G UK Ltd).

Another is where there is no potential commercial competition for the goods of services supplied (Case C-267/08 SPÖ Landesorganisation Kärnten v Finanzamt Klagenfurt).