The VAT Business Test: Economic Activity After Wakefield College

Whether a person is “carrying on a business”, or, in the language of EU-derived VAT law, an “economic activity”, is one of the most fundamental questions in the VAT system. It determines whether a trader must register, must charge output tax and may recover input tax. This guide analyses the modern two-stage test established by the Court of Appeal in Wakefield College v HMRC [2018] EWCA Civ 952, its origins in Longridge on the Thames and the CJEU jurisprudence and how advisers should deploy it in registration, deregistration and input tax disputes.

Why the Business Test Matters

The concept of carrying on a business is central to an understanding of VAT because it determines a person’s entire VAT position. VAT is chargeable as output tax and recoverable as input tax, only by a person who is both a taxable person (registered or liable to be registered) and acting in the course or furtherance of business. Whether an activity is a business therefore affects whether the person is:

• Required to register for VAT once taxable supplies exceed the registration threshold, or, conversely, entitled to deregister where business activity has ceased;
• Required to charge output VAT on supplies and able to recover input VAT on costs. VAT incurred otherwise than in the course of business is irrecoverable;
• Entitled to beneficial treatment , for example, the zero-rating of construction works is available only where a building will be used for a “relevant charitable purpose,” which requires that it is not used for an economic activity.

The question arises most often for charities, not-for-profit bodies, public authorities and persons with marginal or sporadic trading. A misjudged business/non-business analysis can produce assessments for under-declared output tax, denial of input tax recovery or the clawback of zero-rating reliefs, frequently across several years.

The Statutory and EU Framework

Section 4 of the Value Added Tax Act 1994 (VATA 1994) charges VAT on supplies made by a taxable person “in the course or furtherance of any business carried on by him.” The UK courts have consistently held that VATA 1994 must be interpreted consistently with the EU legislation it implemented, principally Article 9(1) of the Principal VAT Directive (Council Directive 2006/112/EC), which defines a “taxable person” by reference to the carrying on of an “economic activity.”

As the House of Lords recognised in Institute of Chartered Accountants in England and Wales v Customs and Excise Commissioners [1999] 1 WLR 701, applying the Marleasing principle of conforming interpretation, the phrase “in the course or furtherance of a business” in VATA 1994 has the same meaning as “economic activity” in the Directive. Following the end of the EU transition period, retained EU case law continues to govern the meaning of these terms and HMRC’s own guidance (for example VBNB13000) continues to treat “business” and “economic activity” as synonymous.

The Old Approach: the Lord Fisher Indicia

For many years practitioners and tribunals approached the business question through the six indicia derived from Customs and Excise Commissioners v Lord Fisher [1981] STC 238 and Customs and Excise Commissioners v Morrison’s Academy Boarding Houses Association [1978] STC 1. Those factors asked, broadly, whether the activity was a serious undertaking earnestly pursued, pursued with reasonable continuity, of a certain measurable amount, conducted on sound and recognised business principles, predominantly concerned with the making of taxable supplies for consideration and of a kind commonly made by those seeking profit.

The Fisher factors remain a familiar checklist, but they are no longer the governing legal test. The Court of Appeal in Longridge and Wakefield College made clear that they must give way to the two-stage economic activity analysis derived from the Directive and the CJEU. The factors may still serve as a useful cross-check, but they cannot displace the two-stage test.

Longridge on the Thames: Motive Is Irrelevant

In Longridge on the Thames v HMRC [2016] EWCA Civ 930; [2017] 1 WLR 1497, a charity that taught water sports, largely using volunteers and charging subsidised fees, sought zero-rating on the construction of a new building on the basis that it would be used for a relevant charitable (non-business) purpose. The Court of Appeal held that the activity was an economic activity, so zero-rating was not available.

The decisive point of principle was that the charity’s motive , its charitable and social purpose, was irrelevant to whether its activities were economic. What matters is the objective character of the activity: the making of supplies of services for consideration on a continuing basis. The fact that fees were subsidised, that volunteers were used and that the predominant concern was charitable did not prevent the activity being economic. Longridge thus swept away the notion that a benevolent purpose could take an otherwise economic activity outside the scope of VAT.

The Two-Stage Test: Wakefield College v HMRC [2018] EWCA Civ 952

The Court of Appeal in Wakefield College v HMRC [2018] EWCA Civ 952; [2018] STC 1170 distilled the modern approach into a structured two-stage test. The College, a further education body, provided subsidised courses to students, some of whom paid reduced fees. The question was again whether a new building would be used for a relevant charitable purpose, which turned on whether the provision of subsidised education was an economic activity.

Stage One: Supply for Consideration

The first question is whether there is a supply of goods or services for consideration. This requires a legal relationship between the supplier and the recipient pursuant to which there is reciprocal performance and a direct link between the service supplied and the consideration received. If there is no supply for consideration, for example, where an activity is wholly grant-funded with nothing given in return by the recipient, the activity is outside the scope of VAT and stage two is not reached.

Stage Two: Made for the Purpose of Obtaining Income on a Continuing Basis

If there is a supply for consideration, the second question is whether the supply is made “for the purpose of obtaining income therefrom on a continuing basis”, the language of Article 9(1) of the Directive. This is the economic activity question proper. It is answered objectively, by examining all the circumstances in which the activity is carried out and comparing the way the activity is actually carried on with the typical way in which the corresponding economic activity is conducted.

The Court of Appeal emphasised that subsidy is not decisive. A direct link between supply and payment can exist even though the price charged does not cover cost. However, where the connection between charge and service becomes so attenuated that the payments cannot realistically be regarded as consideration for the supplies, the activity may fall outside the scope of VAT. This is the territory mapped by the CJEU in Gemeente Borsele.

Gemeente Borsele and Subsidised Charges

In Gemeente Borsele v Staatssecretaris van Financiën (Case C-520/14) EU:C:2016:334, a Dutch municipality provided school transport, recovering a contribution from only about one-third of parents, with the contributions covering a tiny fraction (around 3%) of the total cost. The CJEU held that this was not an economic activity. The asymmetry between the charges levied and the costs incurred, combined with the fact that the charges were means-tested and unrelated to the cost of the service, meant the payments could not be regarded as genuine consideration linking the supply to an economic activity.

Borsele is the key authority for the proposition that, at the margin, a heavily subsidised charge that bears no real relationship to the cost of the service and is paid by only a minority of recipients may take an activity outside the scope of VAT. It must, however, be read alongside Longridge and Wakefield: subsidy alone is not enough; the question is whether, viewed objectively and as a whole, the activity has the character of one carried on to obtain income on a continuing basis.

Babylon Farm and Minimal Activity

In Babylon Farm Ltd v HMRC [2021] UKUT 224 (TCC); [2021] STC 1913, the Upper Tribunal upheld HMRC’s decision to deregister a company and deny input tax recovery. The company’s only activity was the sale of a small quantity of hay to a connected party, generating trivial income, while it sought to recover substantial input tax on the construction of a barn. The Tribunal held there was no economic activity: the minimal, contrived supplies did not amount to the carrying on of a business for the purpose of obtaining income on a continuing basis.

Babylon Farm illustrates the deregistration and input tax dimension of the test. HMRC frequently uses the business test to deregister persons whose trading has dwindled to vanishing point and to deny recovery of input tax on costs that do not relate to any genuine economic activity. The case is a reminder that the second stage of the Wakefield test requires a real, continuing income-generating purpose, not a token or artificial supply engineered to support a recovery claim.

Where the Test Bites: Practical Disputes

Compulsory Registration

HMRC may treat sporadic or hobby-scale activity as a business and assess for failure to notify a liability to register, with a Schedule 41 FA 2008 failure-to-notify penalty. The first line of defence is often that the activity is not an economic activity at all or that the supplies are not made for consideration on a continuing basis.

Deregistration and Input Tax Denial

As in Babylon Farm, HMRC may deregister a person whose economic activity has ceased and deny input tax on associated costs. Where a business is genuinely continuing, even at a low level or in a pre-trading or wind-down phase, the Wakefield analysis supports continued registration and recovery.

Charities and the Relevant Charitable Purpose Relief

Charities seeking zero-rating on construction works under the relevant charitable purpose provisions must show the building will not be used for an economic activity. Longridge and Wakefield make that a demanding test: subsidised, fee-charging activity will usually be economic notwithstanding the charity’s benevolent purpose. Borsele provides the narrow route by which heavily subsidised, cost-unrelated charging may remain non-economic.

Public Authorities and Grant Funding

Public bodies funded predominantly by grants, where recipients give nothing in return, frequently fail stage one (no supply for consideration). The analysis turns on whether payments received are genuine consideration for identifiable supplies or are grants/subventions outside the scope of VAT.

Practitioner Strategy

Structure the Argument Around the Two Stages

Always frame submissions by reference to the Wakefield two-stage test rather than the old Fisher indicia. Identify clearly whether the dispute is about stage one (is there a supply for consideration with a direct link?) or stage two (is it carried on to obtain income on a continuing basis?). HMRC sometimes conflates the two; separating them clarifies the issue and the evidence required.

Marshal Objective Evidence of How the Activity Is Carried On

Stage two is answered objectively by comparing the actual conduct of the activity with the typical conduct of the corresponding economic activity. Gather evidence on pricing methodology, the relationship between charges and costs, the proportion of recipients who pay, continuity and scale of supplies and how the activity is marketed and operated.

Use Borsele Carefully

Where charges are heavily subsidised, means-tested and cover only a small fraction of cost, Borsele supports a non-economic characterisation. But the bar is high after Longridge and Wakefield: be realistic about whether the charging genuinely lacks any real link to the supplies, rather than merely being subsidised.

Mind the Direct Link

The presence or absence of a direct link between supply and payment is frequently decisive at stage one. Grant funding, voluntary donations and payments unconnected to any identifiable supply point away from consideration. Conversely, fees, however modest, that are paid in return for an identified service usually establish the link.

Practitioner Checklist

1. Frame the analysis around the two-stage Wakefield test, not the Lord Fisher indicia.
2. Stage one: Identify whether there is a supply of goods or services for consideration, with a legal relationship and a direct link between supply and payment.
3. Stage two: Assess objectively whether the supply is made for the purpose of obtaining income on a continuing basis, comparing actual conduct with the typical conduct of the corresponding activity.
4. Discount motive. Following Longridge, a charitable or social purpose is irrelevant to whether the activity is economic.
5. Evaluate subsidy carefully. Subsidised or below-cost charges can still be economic; only where charges bear no genuine relationship to cost and are paid by a small minority (per Borsele) is the activity likely to be non-economic.
6. Test for minimal or contrived activity (Babylon Farm) in deregistration and input tax disputes, is there a real, continuing income-generating purpose?
7. Check the relief in issue. For relevant charitable purpose zero-rating, the building must not be used for an economic activity, a demanding test post-Wakefield.
8. Assess time limits and penalties for any failure-to-notify or assessment and consider best judgment principles where HMRC quantifies under-declared output tax.

Frequently Asked Questions