Two-stage test will determine business activity for VAT purposes

HMRC’s long-standing policy that a business activity is possible even in the absence of a profit motive has changed. In light of the decisions in Longridge on the Thames No 2 v CRC [2016] STC 2362 and Wakefield College v CRC [2018] STC 1170 HMRC will no longer apply the business test based on the six indicators from Lord Fisher [1981] STC 238 and Morrison’s Academy Boarding Houses Association [1978] in determining whether an activity is business.

Instead a new two-stage test should be used to determine whether an activity constitutes a business activity:

• Stage 1: The activity results in a supply of goods or services for consideration.
• Stage 2: The supply is made for the purpose of obtaining income therefrom (remuneration).

Where there is a direct or sufficient ‘link’ between the supplies made and the payments given ...