Longridge on Thames – The VAT Business Question Resolved at Last ?
The recent Court of Appeal judgment in the case of Longridge on Thames concerning business is in my view one of the most important for a number of years.
One of the most fundamental concepts in the UK VAT system is that of business. It determines if VAT must be charged and recovered and it also whether certain supplies can be obtained free of VAT.
Since its so important, it is surprising that exactly what business means has been the source of dispute since the start of the tax. The question was first considered in the 1978 case of Morrison’s Academy where the Courts found that a non profit making body that provided lodging rooms was in business for VAT. This was because it made charges and was effectively providing the same thing as commercial lodging providers – it was predominately concerned with making supplies for consideration. It’s activities were also of a scale and organised professionally enough to be a business.
A few years later there was another case, this time concerning a shoot organised by Lord Fisher, who was already registered for VAT for a different activity. He used to run a free shoot for friends and contacts but now asked for a small contribution. Was this a business activity meaning he had to charge VAT ?
The Court found that Fisher shoot was not business as he was not ‘predominately concerned with making supplies for consideration’. Although this test had been applied in Morrison’s, here it was arguably applied differently. Whereas in Morison’s the test considered whether the activities mainly consisted of making supplies – an objective test; in the case of Fisher the test was arguably applied subjectively. Lord Fisher was not in business, because although he made charges these were not his predominant concern. He was only charging to allow him to continue a traditional shoot that had previously been provided for free. He was mainly concerned with having friends round for a shoot, not in making supplies.
In my view ever since Fisher there have been two approaches to the business question. The first has been that if a person makes regular supplies of a reasonable scale then they are in business regardless of the context or their motivation. This has generally been the HMRC view. The second has been that the context is also important and this has led to cases such as Yarborough and St Pauls where charities that make charges are still seen as not being in business. In these later cases the motivation for a non business argument has often been so they can obtain building services free of VAT.
What has been needed is a case that will resolve the argument. This needed to be a case that reached a higher Court than Morrisons, Fisher, St Pauls or Yarborough i.e. the Court of Appeal. HMRC have wanted such a case for 30 years and now with Longridge on Thames they have had it.
In Longridge the Court of Appeal agreed with HMRC that there was a business activity as the Charity made supplies in return for a charge. The context didn’t matter. The predominant concern test that had been applied previously was also probably wrong in terms of EU law. Essentially Morrsions was correct.
It is perhaps ironic that after nearly 40 years of argument the Morrisons/Fisher tension has been resolved on the basis of EU law, within months of UK having decided to leave the EU. Whether it will be overturned on appeal to the Supreme Court or will change if the UK courts are free to ignore the EU in future remains to be seen.
But is it bad news for charities ? – it depends. It is bad for charities that make VAT exempt charges and want to try and get construction work zero rated under the relevant charitable purpose zero rate. But for other charities it may not be. It means that if a subsidised taxable service is provided where input tax recovery will exceed output VAT liability, then HMRC cannot now argue there is a non business activity and prevent repayments. I have a guide to VAT recovery that can be found here VAT recovery guide
There are also non charity implications. It could impact on other smaller scale or hobby businesses such as narrow boat hire or cottage hire or even shoots run by Peers of the Realm.
The judgment is very clear and worth a read. Its can be found here: http://www.bailii.org/ew/cases/EWCA/Civ/2016/930.html