VAT Update – June 2022

29 Jun 2022

VAT Update

In this month’s VAT Update we outline HM Revenue & Customs’ (HMRC’s) change in approach to determining business from non-business activities; we highlight a case where transfer of a going concern (TOGC) VAT treatment was denied on the sale of a property; we look at the steps required to avoid Making Tax Digital (MTD) penalties and highlight a pilot being run by HMRC to speed up option to tax elections.

HMRC has issued Revenue & Customs Brief 10 (2022) to announce a change in approach when considering whether an activity is being carried out in the course of business or whether it is a non-business activity. The concept of ‘business’ or ‘economic activity’ is fundamental to the VAT system. If an activity is deemed to be non-business it means it is outside the scope of VAT and no VAT needs to be brought to account, but it also means that no VAT can be reclaimed on costs associated with that activity.

The latest update has been issued as a result of cases where taxpayers argued that their non-business activities permitted them to issue zero-rated certificates for the construction of new properties. HMRC was successful in arguing that their activities were in the course of business and zero-rating was not therefore appropriate.

Historically, HMRC and businesses have relied on a series of tests from Lord Fisher [1981] STC 238 and Morrison’s Academy Boarding Houses Association [1978] STC 1. These are very old cases and have been overtaken by more recent judgements. HMRC is now adopting these more recent decisions in its guidance.

The judgement in Wakefield College [2018] BVC 22 suggested a two-stage test, which HMRC is now incorporating:

Stage 1: The activity results in a supply of goods or services for consideration. There must be a legal relationship between supplier and recipient which determines the recipient will pay a consideration to the supplier for goods or service received. The absence of consideration would generally indicate a non-business activity, however deemed supply rules would still need to be factored in.

Stage 2: The supply is made for the purpose of obtaining income therefrom (remuneration). For an activity to be a business activity it must be undertaken for the purpose of obtaining income, even if that income does not cover all of the costs.

Both stages need to be considered as there are circumstances where consideration will be received for a supply but below market value and this may suggest that the activity is not being undertaken for the purposes of receiving income.

HMRC suggests the business tests that came out of Lord Fisher and Morrison’s Boarding Academy are still helpful in providing an indication of the types of factors to be considered when determining whether an activity is business or non-business, however they will be adopting the two-stage approach now, as described.

Comment: It is perhaps not unsurprising that HMRC is stepping away from case law that is 40 years old, and adopting an approach based on more recent court judgments.

At this stage, HMRC’s comments focus on cases relating to the issue of zero-rating certificates rather than to wider business/non-business issues, such as VAT recovery on costs or the nature of income received. However, the change in policy will be of particular interest to charities and not-for-profits, as they typically have non-business activities. They should review their position to see if under the new two stage test, they would need to consider a different treatment with respect to certain activities.

HMRC’s change in approach may have a wider impact, and transactions undertaken without the expectation that payment will be received, or for a consideration that is below market value, must now be considered at risk of HMRC concluding it is a non-business activity. This will affect VAT recovery on associated costs.

To discuss the implications of HMRC’s change in policy please contact Alison Hone, VAT Partner.

Revenue and Customs Brief 10 (2022): VAT — business and non-business activities – GOV.UK (

The First Tier Tribunal (FTT) case of Haymarket Media Group Limited (TC/2019/00989) highlights the need to tread carefully when applying transfer of a going concern (TOGC) treatment to a disposal of land or property. The court concluded in Haymarket that the sale of TV studios was not TOGC as there was neither a property development business nor a property rental business being transferred. It also highlights that TOGC’s cannot be artificially created to achieve a VAT cash flow or, as in the Haymarket case, for the buyer to pay less Stamp Duty Land Tax (SDLT).

In trying to achieve a TOGC, the appellant (the transferor in this case) sought to put into place arrangements to enable it to treat the transaction as the sale of a property rental business The FTT did not agree. The issue was that the tenants at the time of completion of the property sale had been introduced by the buyer and the seller had always intended to sell with vacant possession. The appellant’s fallback position, that it was running a property development business, also failed to gain favour with the court based on the facts.

Comment: The sale and purchase agreement required the property to be transferred with vacant possession. In the FTT’s opinion, this made it clear that the transferee was not receiving the property with the benefit of an existing tenant and there was therefore no property rental business being transferred. The seller’s fallback argument was that it was transferring a property development business. This can be a difficult point to argue though, and the court was not convinced that the work and actions prior to sale met the test of a business being carried on for VAT purposes.

TOGC’s involving land and property are complex and advice should be taken to ensure the TOGC provisions apply and all the necessary conditions are being met by both parties. Attempts to manufacture a TOGC for VAT cashflow, or a VAT or SDLT saving, can result in HMRC challenging the arrangements.

Haymarket Media Group Limited v the Commissioners for HM Revenue & Customs

HMRC has published a summary of how to comply with Making Tax Digital for VAT and, in the process, avoid the risk of penalties for non-compliance. It also sets out the penalties that will apply.

The elements required for MTD compliance are:

  • Sign-up to MTD for VAT – all VAT registered businesses and persons must now do this, regardless of size of turnover.
  • File VAT returns using functionally compatible software or bridging software.
  • Keep digital records.
  • Use digital links to transfer or exchange data.
  • Use the checking software within the functionally compatible software as part of the pre-submission review process that should be adopted.

Penalties apply for non-compliance in the above areas, ranging from £400 for not submitting a VAT return to HMRC in the correct way, to 100% of the tax due for a VAT return submitted containing an error.

Comment: The timing of this publication follows the mandatory provisions that apply from 1 April 2022 requiring all VAT registered businesses and persons to sign up for MTD. It suggests that HMRC will check taxpayers’ application of the MTD for VAT rules and requirements during compliance checks and VAT audits. It is therefore important that the necessary steps are taken, otherwise the risk of penalties is very real, as it seems likely HMRC will now enforce the MTD rules with more vigour than has previously been the case.

Compliance checks: How to avoid penalties for Making Tax Digital for VAT – CC/FS69 – GOV.UK (

From the end of May 2022, HMRC has begun a six-week trial at the Option to Tax Unit, with the aim of speeding up the option to tax notification acknowledgement process.

Under the trial, HMRC will continue to acknowledge receipts of notification, but will no longer acknowledge the validity of the elections, with the onus now being put on the taxpayer to ensure that the notification is correctly made.

The option to tax acknowledgement letter issued by HMRC during the trial period will now just become an acknowledgement of a receipt of the option to tax notification, with only minimal checks being applied by HMRC.

The notification process and the VAT 1614a form used to notify elections will remain the same, but the new acknowledgements, based on what we have seen so far, do not mention the effective date of the option to tax and it simply refers you back to the 1614a form submitted. It is therefore particularly important that when submitting an option to tax election to HMRC that a copy of the 1614a form is retained on file along with any accompanying plans that show exactly what has been opted. HMRC’s receipt acknowledgement alone may in future prove to be insufficient when demonstrating to buyers or tenants and their lawyers, that a valid option to tax has been made.

Comment: We welcome any steps taken to improve HMRC processing times, which are currently causing many issues with land and property transactions. However, the lack of certain details on the current versions of the receipt acknowledgement is concerning and we can foresee problems if a copy of the original submission to HMRC is not retained.

It remains to be seen whether the trial process will become a permanent one, but regardless, it is good practice to ensure notifications are correctly completed and signed by the appropriately authorised person, and then retained on file.

We expect the above will only apply to standard options to tax, and that HMRC will continue to review belated notifications in detail and elections where HMRC’s permission to opt to tax is required. We await with interest the version of the acknowledgement letters for those type of notifications submitted during the trial period.