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You might imagine that deciding whether or not an activity is a business activity would be quite straightforward. You might imagine that, but if you did so, you would be very wrong indeed, certainly if you were trying to establish what a business activity was for VAT purposes.
Although HMRC have recently announced that they are changing the tests that they will apply to determine whether or not an activity is a business activity, the topic remains a very troublesome one, as a closer look at some other recent HMRC changes and the contrasting approaches taken by HMRC and the European Court of Justice (‘ECJ’) will demonstrate.
The VAT Act 1994 (the primary UK legislation on which our VAT rules are based) states that ‘business’ “includes any trade, profession or vocation.” Apart from clarifying that the provision of facilities to club members and entrance to premises for a consideration are both business activities, that’s about all you get in the UK VAT legislation regarding what constitutes business. The EU VAT Directive on which the UK’s VAT legislation is based, although no longer bound by, talks of ‘economic activity’ rather than business activity: “Any activity of producers, traders or persons supplying services, including mining and agricultural activities and activities of the professions, shall be regarded as economic activity. The exploitation of tangible or intangible property for the purposes of obtaining income therefrom on a continuing basis shall in particular be regarded as an economic activity.”
Because the legislation is so general when it comes to the definition of business/economic activity, HMRC have long relied on tests that have emerged from cases that were heard in the VAT Tribunal or higher courts.
The two most influential cases over the years have been Morrisons Academy (1978) and Lord Fisher (1981), from which emerged he 6 tests that have typically been the basis for resolving other cases
These 6 tests are:
However, HMRC have announced that their approach has now changed, and that although the 6 tests that arose from Morrisons Academy and Fisher can still be used “as a set of tools designed to help identify those factors which should be considered” they will no longer be used by HMRC to determine whether or not an activity is a business activity.
Instead, HMRC will take the approach that was developed in the cases of Longridge on the Thames (2016) and in particular Wakefield College (2018).
Their two new tests are as follows:
HMRC explain that there needs to be a legal relationship between the supplier and the recipient, so the first step is to consider whether a supply is made for a consideration. An activity that does not involve the making of supplies for consideration cannot be business activity for VAT purposes.
HMRC explain the second test by stating that if there is a direct or sufficient link between the supplies made and the payments given, the activity is regarded as an economic activity. The Court in Wakefield College made a distinction between consideration and remuneration. Simply because a payment is received for a service provided does not itself mean that the activity is an economic activity. For an activity to be regarded as an economic activity, it must be carried out for the purpose of obtaining income (remuneration) even if the charge is below cost.
We wait to see what the outcome of the new tests will be, but it can already be seen that applying tests such as these often fails to deal with nuances, so are often never enough to provide a satisfactory conclusion.
For example, HMRC recently reviewed the VAT treatment of compensation payments following some high profile ECJ cases relating to payments due on the termination of phone contracts (Vodafone Portugal and MEO).
In the past, HMRC had treated such termination payments as being outside the scope of VAT as compensation payments. After Vodafone Portugal and MEO, HMRC announced that such termination payments would now become subject to VAT as further payment for supplies made under taxable phone contracts.
Interestingly, when HMRC previously treated these payments as being outside the scope of VAT, they didn’t think that this meant that the phone companies carried out any ‘non-business’ activities, just that outside the scope income was received in the course of carrying out business activities.
Contrast this with HMRC’s position on Parking Charge Notices (‘PCNs’) issued by parking operators. Not only do HMRC consider PCNs to be outside the scope of VAT, they also consider the activities carried out by parking operators in issuing and enforcing PCNs to be ‘non-business’ activities, so VAT incurred on related costs must be treated as irrecoverable.
PCNs are issued when a motorist contravenes a car park’s terms and conditions and HMRC’s current policy is that PCN revenue is outside the scope of VAT fo the parking operators issuing the PCNs because the PCN payment made by the errant motorist is neither payment for goods nor payment for services, but effectively a payment to compensate the parking operator for breaching the parking terms. This appears sensible, as does the argument that because PCNs are issued as a deterrent measure to prevent car parks from being abused, the issue of PCNs by a parking operator is a necessary part of the parking operator’s business activities.
However, HMRC’s current approach is to treat the issue and enforcement of PCNs as a separate, distinct ‘non-business’ activity for parking operators (separate from the taxable business activity of operating/managing a car park).
Also contrast this with the position of the ECJ, who in the recent case of Apcoa Parking Danmark ruled that not only was the issue and enforcement of PCNs an economic activity for VAT purposes, PCN payments were subject to VAT at the standard rate.
HMRC will have been aware of the Apcoa Danmark case when carrying out their review of the VAT treatment of compensation payments, and although the UK is no longer bound by ECJ decisions, they do remain persuasive. So, in their revised VAT policy document on compensation payments, HMRC specifically state that if a PCN is “substantial and punitive and is designed to deter a breach of the terms and conditions of parking it will be outside the scope of VAT as the reciprocity needed to link it to the supply is lacking. If on the other hand it is effectively an additional charge for occupying a space, then it would be a standard rated supply. The level of the fee for breaching the parking terms in comparison to the standard parking fee may be indicative of which category a particular fine would be in.”
HMRC’s last comment about the deterrent value of a PCN is also interesting in the context of the government’s current attempts (via the Private Parking Code of Practice) to reduce the maximum value of PCNs issued for parking contraventions private land, so watch this space for further VAT news if the typical value of a PCN drops to £50 or less.
But until HMRC provide much clearer legislation and guidance, particularly on the extent to which a taxpayer’s activities can be split into separate business and non-business activities, no number of tests will provide answers to all the questions.
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