What Constitutes Business Income?

The basic legislation is quite simple. VAT is charged on supplies of goods or services made ‘in the course or furtherance of any business’ (VAT Acts 1994, s4(1)).

But, decades of case law have ensured that matters are no longer so straightforward. Whether an activity operated by a charity is treated as a business or not, will have certain implications in respect of VAT.

Donations – a gift of money without receiving anything in return, is outside the scope of VAT;

  • Where a gift is acknowledged by a low value item, such as a lapel sticker, that is still a gift.

If goods or services are provided in return for a payment, in principle, that is a business activity. It may be subject to VAT at 20%, or 5%, or 0%. Or it may be exempt from VAT.

Grants – this is a particularly complex area. If a charity has to provide certain services to the grantor, that may be deemed to be made in the course of a business. If the charity simply reports back to the grantor as to how it has spent the month, it is likely to be outside the scope of VAT.

The High Court has held that a significant question to be asked is whether an activity is ‘predominantly concerned with the making of taxable supplies for a consideration.’ This test means that, in certain circumstances, the provision of goods or services for a consideration is NOT treated as a business activity for VAT purposes.