VBNB20400 | VAT Business and non-business basic principles: purpose of activity

The purpose of an activity must not be confused with the ultimate purpose (historically described as the ‘predominant concern’) of the person carrying on the activity.

The activity itself must be objectively considered to determine whether it is business activity. The fact that it is carried out by an organisation whose overall aims are non-economic (e.g. a charity or a public body) does not change that.

Some organisations have taken the view that they were not in business because they do not have a profit motive. However, that is not determinative of whether an activity is business or not.

Whether the purpose of the activity is to generate income is a relevant factor. The purpose for which the expenses were incurred is also relevant to the question of whether the VAT incurred on purchases can be recovered.

For a taxable person to be entitled to recover the VAT incurred on costs, those costs must have been incurred for its taxable business activities. Guidance, VIT10200 provides further information.

The question of whether activities are business or non-business is also relevant to whether a person is eligible for certain reliefs. These reliefs are available for costs which relate solely to charitable or non-business purposes. For example, a charity organisation may incur VAT costs on the construction of a building to be used for their charitable activities. However, the fact that the activity is charitable does not mean that the activity is non-business and therefore that they are entitled to zero rating of the services received. First, the charitable activities must be examined to determine whether they are business or non-business. Unless the services are only used for the non-business activities, they would not be eligible for zero rating. Where the building is to be used both for business and non-business, the VAT costs on the construction services will not qualify for the zero rate of VAT. [Longridge on Thames]