VBNB20200 | VAT Business and Non-Business Basic Principles: The concept of ‘business’ for VAT purposes

The concept of business is central to the operation of the UK VAT system.

An activity will fall within the scope of VAT when all the conditions listed in sections 4(1) and 5(2) of the VAT Act 1994 are met:

• it is done for consideration

• it is a supply of goods or services

• the supply is made in the UK

• it is made by a taxable person;

• it is made in the course or furtherance of any business carried on or to be carried on by that person.

The principle of ‘made in the course or furtherance of a business’ impacts on whether VAT incurred on purchases can be deducted as input tax or not and whether there is a liability to account for output tax. Generally, VAT incurred for business purposes is deductible as input tax subject to the normal conditions while VAT costs relating to non-business activities cannot be deducted.

Who is a taxable person?

A taxable person is someone who carries out a business activity in their country of establishment or someone who is VAT registered in the UK or is required to be VAT registered. However, there can be situations when a taxable person may not be acting as such in a particular transaction. Because an activity is carried out by someone who is VAT registered does not automatically mean the activity is business for VAT purposes.

In the case law JDI International Leasing Ltd (JDI) [2018] BVC 516, the taxable person acquired tools for oilfield exploration and although the tools are designed for commercial exploitation, JDI did not exploit them itself but allowed another business to use them free of charge. As such the purchase was not for the business activity of JDI. Accordingly, the court found that the taxable person was not acting as a taxable person when it acquired the tools.