VAT is a tax on supplies made by businesses. Surely therefore VAT has nothing to do with charities because they are not in business but exist because of their charitable objectives. Whilst seemingly a sensible approach, charities do get involved in a very wide range of activities that could be seen as businesses for VAT purposes.
The fulfilment of charitable objectives will not normally constitute a business as such. Helping to provide relief and support to those in need in society is not a generally accepted business activity. But a lot of the activities a charity engages in in order to fund its charitable functions could cross the line.

Benefits to charities of being ‘in business’

One thing we come across many times is that charities don’t want to get involved with VAT and so deliberately try to avoid being seen to be in business. Whilst understandable because the compliance cost can be high and the potential for penalty worrying in the case of error, there can of course be advantages.
There are reliefs available which mean that some otherwise taxable activities are relieved and these can mean that even though there is a business being carried on, VAT registration can be avoided or even give rise to absolute gains.

What is a business?

So, if VAT is a tax on business supplies surely, this fairly fundamental concept “what is a business?” is set out in the legislation? Interestingly, it is not. In some ways this is disappointing as it leaves things unclear but in others it is useful as it gives room for interpretation and planning.
The law gives some guidance and states that the concept of business includes all trades, professions and vocations. It also includes supplies made by clubs and associations to members (no mutual trading relief or exemption here) and the grant of the right to enter premises.

Key tests

Not surprisingly this lack of definition has led to many Tribunal and court cases to test whether specific organisations were or were not in business. As a result of this we now have six key tests to consider.
1. Is the activity seriously and earnestly pursued?
2. Does it have reasonable and recognisable continuity?
3. Is there a degree of substance when looking at the values of supplies made?
4. Are activities undertaken in a regular manner and on recognised business principles?
5. Is it concerned primarily with making taxable supplies?
6. Is the activity something that would normally be done by businesses with a view to making a profit?

None of the indicia here are decisive on their own but all point one way or another. For example, where there are very high values involved there is likely to be a business but not necessarily so (indicator 3). Take the case of Wellcome Trust. It funded a lot of its activities through income derived from “profits” made from investment activities. It did this on a very significant sale. The case arose when the Trust sold a substantial part of its portfolio and realised a gain of £2.18bn. It was argued that this level of activity must be a business which would have allowed the Trust to recover a lot of input tax. However, the court ruled that value alone was not sufficient to create a business and that in realising the gain the Trust was not acting any differently to a private investor. This was not a business.
Similarly, an individual who collected old farm machinery as a hobby that he regularly sold items to fund new acquisitions into the collections was deemed not in business (indicator 2 was the only real one satisfied). But a car enthusiast who bought and sold regularly was ruled to be as he was deliberately seeking to make a profit and organised himself professionally using web sites etc. (indicators 6 and 1).

What does it mean for your charity?

Given the complexity of this area, seek the advice of a charity VAT specialist to assess if this could actually benefit your charity.