Charities to complete 2 stage test to assess VAT liability

Overview:

HMRC has clarified the definition of business activities for VAT purposes for charities and the two-stage test. 

Although charities may not be deemed to have any business activities under other laws, the definition of business for VAT purposes is governed by specific VAT principles. These principles are based on UK VAT law, and the findings of tribunal and High Court decisions.

As a result, even if an activity is carried out for the benefit of the community or to achieve charitable goals and objectives, it may yet be classified as a business activity for VAT reasons.

An organisation that is run on a not-for-profit basis may still be regarded as carrying out a business activity for VAT purposes.

What is the 2-stage test to assess VAT liability for charities? 

To decide if an activity is a business activity for VAT purposes, charities need to consider whether there is a direct link between the services received and the payment made.

They need to apply a two-stage test.

Stage 1: The activity results in a supply of goods or services for consideration

This requires the existence of a legal relationship between the supplier and the recipient.

The first step is to consider whether the supply is made for a consideration. An activity that does not involve the making of supplies for consideration cannot be a business activity for VAT purposes.

Stage 2: The supply is made for the purpose of obtaining income (remuneration)

An activity is not economic just because a payment is received. It must also be carried out for the purpose of obtaining income (remuneration), even if the charge is below cost.