It is sometimes useful when considering a transaction to “go back to basics” for VAT purposes.
There are four tests to determine whether a supply is taxable and these are set out below.
Broadly, these tests establish whether UK VAT is payable on a sale. A transaction is within the scope of UK VAT if the following four conditions are satisfied.
1. It is a supply of goods or services
There is a distinction between the two types of supply as different VAT treatments may apply. However, if no goods are services are actually provided, there is no supply. Indeed, if there is no consideration for a supply, in most cases it is not a taxable supply.
2. It takes place in the UK
There are sometimes quite complex tests to consider when analysing the “place of supply”, especially where services are concerned. If the place of supply is outside the UK then no UK VAT is due, however, the supply may be subject to VAT in another country.
3. It is made by a taxable person
A taxable person is any legal entity which is, or should be, registered for VAT in the UK.
4. It is made in the course or furtherance of any business carried on by that person
The term “business” is only used in UK legislation, The Principal VAT Directive refers to “economic activity” rather than “business” and since UK domestic legislation must conform with the Directive both terms must be seen as having the same meaning.
Related reading: “How can I save business tax?”
Since the very first days of VAT there have been disagreements over what constitutes a “business”.
I have only recently ended a dispute over this definition for a (as it turns out) very happy client. The tests were set out as long ago as 1981 and may be summarised as follows:
- Is the activity a serious undertaking earnestly pursued?
- Is the activity an occupation or function, which is actively pursued with reasonable or recognisable continuity?
- Does the activity have a certain measure of substance in terms of the quarterly or annual value of taxable supplies made (bearing in mind that exempt supplies can also be business)?
- Is the activity conducted in a regular manner and on sound and recognised business principles?
- Is the activity predominately concerned with the making of taxable supplies for a consideration?
- Are the taxable supplies that are being made of a kind which, subject to differences of detail, are commonly made by those who seek to profit from them?
- So, if the four tests are passed a taxable supply exists. The next step is often to establish which VAT rate applies!
It is often easier to consider what isn’t a taxable supply to establish the correct VAT treatment.
Related reading: “How do I manage VAT?”
Specific examples of situations which are not taxable supplies are; donations, certain free supplies of services, certain grants or funding, some compensation and some transactions which are specifically excluded from the tax by legislation, eg; transfers of going concerns.
I think that it is often the case that the basic building blocks of the tax are overlooked, especially in complex situations and I find it helps to “go back to the first page” sometimes!