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HMRC internal manual

VAT Business/Non-Business Manual

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Legal history: cases about the business test

Please note that the following material is not a full summary of the case - it merely highlights the principle referred to in the appropriate section of this manual.

Morrison’s Academy Boarding Houses Association 1978 STC 1

The association was a charity and limited company. Its object was to establish and maintain boarding houses for the accommodation of pupils attending Morrison’s Academy. The Memorandum of Association stated that all income had to be put towards the promotion of its objects. The income could not be distributed by way of profit or dividend.

A charge was made to the parents of pupils attending the school for the provision of accommodation. It was accepted by both sides that these constituted taxable supplies and that the association was a taxable person.

The question at issue was whether they were supplies carried out in the course of business. The tribunal found they were not. This was because there was an absence of profit and therefore of commercial purpose.

The case was referred to the Court of Session. The Court decided that whether an activity carried on by a taxable person constituted a business was to be determined by considering the whole of the activities carried on. Lord Emslie’s remarks are much quoted.

“I now ask myself first of all whether the Tribunal were correct in concluding that no activities carried on continuously by a taxable person can ever be business if the profit motive is absent. In my opinion they were not.

“I can discover nothing in the natural meaning of the word business so to restrict its scope and there is nothing in the context of the taxing provisions as a whole to require one to read “business” in such a narrow way: the tax is after all, not a tax on profit or income but on taxable supplies by taxable persons and to make liability to tax dependent on the motive with which the activities are carried on would lead to the unreasonable result that where two taxable persons make identical taxable supplies in the course of carrying on an identical activity or occupation in which each make the same loss, or neither a profit nor a loss, and one has sought to make a profit and the other has not, only the former would be accountable for Value Added Tax.

“In my opinion it will never be possible or desirable to define exhaustively “business” within the meaning of s2 (2) b (now 4(1)). What one must do is to discover what are the activities of the taxable person in course of which taxable supplies are made. If these activities are as in this case, predominately concerned with the making of taxable supplies to consumers for a consideration it seems to me to require no straining of the language of s 2(2)(b) of the 1972 act to enable one to conclude that the taxable person in the “business” of making taxable supplies, and that the taxable supplies which he makes are supplies made in the course of carrying on that business, especially if, as in this case, the supplies are of a kind which, subject to differences of detail , are made commercially by those who seek to profit from them.

For my own part I consider that there is no justification for the necessity of there being any “commercial element” in these activities to bring the associations supplies within the scope of the tax.”

Lord Fisher 1981 STC 238

Lord Fisher ran a shoot on his estate to which he invited friends and relations. The shoot was well established and was a society event. Traditionally it had been put on for free. However, in order to defray the mounting cost of such an entertainment it was decided to ask for contributions from participating guests. The contributions amounted to over £1500 per person in 1977.

Lord Fisher was registered for VAT in respect of his estate and wildlife park. He also accounted for tax on receipts from occasional commercial shoots. Both sides accepted that in granting guests the right to shoot a supply was being made to the participants for consideration. The question was whether this was made in the course or furtherance of business.

Mr Justice Gibson rejected HMRC’s contention that it was and that tax should therefore have been accounted for on the contributions. In his judgment he reviewed the tests applied in Morrison’s. He concluded that, in putting on a shoot previously put on free, Lord Fisher could not be said to be predominately concerned with the making of taxable supplies for consideration.

St Paul’s Community Project Ltd 2005 STC 95

This charity ran a nursery. Some places were reserved for children referred by the local authority. The tribunal allowed the charity to zero rate construction of a new building.

The High Court upheld the tribunal’s decision on appeal. It noted that the nursery was not ‘predominantly concerned with the making of taxable supplies to consumers for a consideration’.

The Court found that the intrinsic nature of the enterprise was not the carrying on of a business. It identified the distinguishing features as the social concern for the welfare of disadvantaged children, lack of commerciality in setting fees and the overall intention simply to cover costs.

Therefore, the provision of nursery and crèche facilities by charities, along the same lines as those in St Paul’s Community Project Ltd, is not a business activity for VAT purposes.

Vereniging Noordelijke Land-en Tuinbouw Organisatie (VNLTO) 2009 STC 935

An organisation claimed input tax on the costs of the general promotion of its members’ interests. The Court was asked to rule on when Articles 6(2) and 17(2) of the Sixth Directive apply.

It held that they do not apply to the use of goods and services allocated to the business for the purpose of transactions which are not taxable transactions of the taxable person. This is because the tax on goods and services that relates to transactions that are not taxable cannot be claimed.

The Court stated that ‘business’ extends beyond economic activities giving rise to supplies within the scope of VAT. It also includes any activity that forms part of the wider purpose of the taxable person’s undertaking or enterprise.

So if the activity is part of the taxable person’s wider purpose, the term ‘business’ covers even those activities that are not economic activities (such as those outside the scope of VAT) and which are not normally regarded as ‘business’ for UK VAT purposes.