Tax update: VAT impact - the new business test

Published: Tuesday 4 October 2022

HMRC has issued new guidance revising its interpretation of the law on whether an organisation can be considered to be ‘in business’ or not for VAT purposes (Business Brief 10/22).


The impact of being in business or not can be critical to successfully recovering VAT as input tax or being obliged to register in the first place, as many who have sought to make early claims or stay below the threshold may attest.

This change in direction will be of particular interest to anyone receiving grant income or government subsidies, along with those operating charities or nascent start-ups.

Conversely, some organisations in the low-cost-care and not-for-profit sectors may positively wish to remain outside of the scope of VAT and avoid registration.

The old test

Historically, HMRC has applied the ‘business test’ as delineated by the courts in Lord Fisher [1981] STC 238 and Morrison’s Academy Boarding Houses Association [1978] STC 1 as considering whether an 

  1. is a serious undertaking earnestly pursued;
  2. is an occupation or function actively performed with reasonable or recognisable continuity;
  3. has a certain measure of substance in terms of periodic supplies or economic output;
  4. is conducted in a regular manner and on sound business principles;
  5. is predominantly concerned with making taxable supplies for a consideration; and
  6. is of a type which are commonly conducted by those seeking to make a profit.

The clear emphasis was on establishing the existence of profit. In both Yarburgh Children’s Trust [2002] STC 207 and St Paul’s Community Project [2005] STC 95, a nursery failed the test by setting prices at a level intended only to cover costs. Although HMRC has acknowledged that a profitseeking motive technically need not always exist, this has always been a difficult position to argue.

The new test

Emerging from the recent Court of Appeal judgments, including Longridge on the Thames [2016] BVC33 and Wakefield College [2018] BVC 22, is now a simplified approach in the form of a two-stage test.

Rather than seeking profit or observing business principles, the focus should now be more on whether there is a direct link between the specific services being provided and the payment made in return.

This new two-stage test in summary is:

  1. Does the activity result in a supply of goods or services?
  2. Is that supply made for the purpose of obtaining remuneration?

The classic term ‘consideration’ is deliberately not used here, in seeking to distinguish any form of payment from one which may be specifically set below cost or lack any profit seeking motive at all.


This revised approach, focussing more on the direct link rather than hallmarks, is reminiscent of the strategy taken by the ECJ (as it then was) in the early VAT cases of Tolsma (Case C-16/93) and the Apples and Pear Development Council (Case C-102/86).

HMRC now state that the old six business indicators will no longer be applied in their decision making and the new two stage test will now be used to determine whether a taxpayer is ‘in business’ or not.


The question now is whether these revised criteria will give HMRC greater flexibility to consider whether wider activities should qualify for VAT recovery as a business activity and whether it will be used as both a shield and a sword.

We would hope that any clients who have previously been denied input tax recovery or refused VAT registration on such grounds may be willing to revisit whether the VAT regime is now more accessible to them.