Business or non-business for VAT purposes?

The First-tier Tribunal decision in Goodman Equine Ltd v The Revenue and Customs Commissioners ([2012] UKFTT 565, published on 17 September 2012) focused on the dividing line between an activity which qualifies as a business and an activity which does not (e.g. a hobby).

Goodman Equine Ltd bought a horse and declared that it had a business activity of “show jumping and trading in horses.”

The Tribunal summarised the six business tests set out by the High Court in CEC v Lord Fisher ([1981] STC 238) as:

(1) whether the activity is a serious undertaking earnestly pursued;

(2) whether the activity is an occupation or function actively pursued with reasonable or recognisable continuity;

(3) whether the activity has a certain measure of substance as measured by quarterly or annual value of taxable supplies made;

(4) whether the activity is conducted in a regular manner on sound and recognised business principles;

(5) whether the activity is predominantly concerned with the making of taxable supplies to consumers for a consideration; and

(6) whether the taxable supplies are of a kind which, subject to differences of detail, are commonly made by those who seek to profit by them.

The Tribunal found that the vast majority of the above tests were failed.  As sponsorship income had been sporadic and as Goodman Equine Ltd had made no sales of racehorses, even refusing an offer for the horse, the Tribunal concluded that the company’s activity was “more closely connected to the pleasure and social enjoyment of equestrian activities by Mrs Goodman than it is to a business”.

This case reminds us that VAT cannot be reclaimed on purchases if the activity does not satisfy the six “business” tests.

For further information on deciding whether a claim for input tax is justifiably attributable to the making of business taxable supplies or whether VAT registration is applicable, please contact the TaxDesk on 0845 4900 509 and ask for Vaughn Chown (VAT) or Kevin Hall (VAT).