VAT and Charities: The business of being ‘in business’
The Court of Appeal has released one of the most important UK VAT decisions of recent years in HMRC v Longridge On the Thames  EWCA Civ 930. In finding for HMRC the Court has clarified the meaning of ‘business’ in UK Law and reconciled it with ‘economic activity’ in the EU Directive.
The judgement calls into question any claims of non-business activities by charities trying to secure the zero-rate of VAT on the construction or purchase of new charitable buildings. Not only will it be harder to access the zero-rate in future, but it potentially paves the way for HMRC to assess builders, developers or charities for VAT and penalties on previous transactions.
If you are a charity, contemplating whether you are ‘in business’is a bit like walking a tightrope. Leaning to the ‘business’ side will mean that you can secure VAT recovery on some costs but miss out on some reliefs, leaning to the ‘non-business’ side will mean less recovery but the potential to secure VAT relief on major costs such as building works. Savvy charities will tread a careful line between the two positions.
There is no comprehensive definition of ‘business activities’ in UK legislation or of the equivalent ‘economic activities’ in EU legislation. As a result most charities turn to the Lord Fisher test for guidance, a test that stems from a case now 35 years old (C & E Commrs v Lord Fisher  STC 238).
The Lord Fisher test is commonly used to build arguments either for or against purported business activities, and is referred to in numerous references, including VAT Notice 701/1: charities (reproduced below):
- Is the activity a serious undertaking earnestly pursued? (This considers whether the activity is carried on for business or daily work rather than pleasure or daily enjoyment.)
- Is the activity an occupation or function which is actively pursued with reasonable or recognisable continuity? (When considering this test you should consider how frequently the supplies will be made.)
- Does the activity have a certain measure of substance in terms of the quarterly or annual value of taxable supplies made?
- Is the activity conducted in a regular manner and on sound and recognised business principles?
- Is the activity predominately concerned with the making of taxable supplies for a consideration?
- Are the taxable supplies that are being made of a kind which, subject to differences of detail, are commonly made by those who seek to profit from them?
Applying the Lord Fisher test is more art than science, HMRC readily admit that the test is less of a checklist and more of a guide. With the level of ambiguity involved in applying these principles it can be tempting for a charity, and for HMRC, to pick an interpretation which suits them at the most opportune time.
This should change as a result of the Longridge case. In one fell swoop, The Court has all but consigned the Lord Fisher test to the history books.
The test had been used to build a small body of case law that showed that a charity could be economically active without necessarily carrying on an ‘economic activity’. The most referred to cases were the C & E Commrs v St Paul's Community Project Ltd, Ch D 2004,  STC 95;  EWHC 2490 (Ch) and C & E Commrs v Yarburgh Children's Trust, Ch D 2001,  STC 207.
One of the key points to come out of these cases was that a business could not exist where activities were not ‘predominantly concerned with the making of taxable supplies’ – the penultimate question on the Lord Fisher test above.
The Longridge judgement agrees with HMRC in stating that these cases have been wrongly decided and that the ‘predominant concern’ of a charity’s activities should not be given any weight.
The new business test can be distilled as follows:
- Are supplies being made in return for consideration?
- Are the supplies "permanent" as part of an established activity, regularly carried on?
- Is there a direct link between the supplies and the consideration?
If there is a sufficient link between the supplies and the consideration then the activities are considered business or economic in nature by default.
This can only be displaced if there is some significant factor (or combination of factors) which rebuts this ‘general rule’. This does not include, for example, the absence of a profit making motive, that the activities are linked to a charity’s aims, the receipt of subsidies or predominant concerns.
Overall the result will be bad news for a lot of charities that have secured or hope to secure VAT relief on new charitable buildings on the basis of the Lord Fisher test. The judgment potentially lays the groundwork for HMRC to assess builders, developers and charities for historic VAT and penalties.
Beyond the construction or sale of new charitable buildings, the judgement may also impact previously ‘disapplied’ options to tax. When a building that is opted to tax is rented out, VAT is generally applied at the standard rate. However, when the building is rented out to charities for non-business purposes, the supply instead defaults back to being exempt. As a result of the Longridge ruling, there is a good chance that in some of those cases the option to tax should not have been disapplied and VAT should have been applicable.
It remains to be seen whether Longridge will appeal to the Supreme Court. If the judgment stands, then there will be significant ripples throughout the charity sector. Some will be pleased to see greater clarity on what has been a very contentious area of VAT law, but this will be of little consolation to those issued with assessments.
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