What Counts as a Business Activity?

What Counts as a Business Activity?
The question ‘What is a business?’ may seem unnecessary at first thought; the difference between a private individual and a business appears obvious. But if you look a little closer, it is not so clear cut and many of us could be crossing tax boundaries.


What is a Business?

This can be a particularly important question when dealing with a sole proprietor who has a number of different activities or when a ‘hobby’ takes on the characteristics of a business. 


The House of Lords (Lord Fisher v HMC & E STC 238) set out 6 questions to be asked to establish if an activity is a business and HMRC will use these to determine if an activity is a business.


Number Question 
1. Is the activity a serious undertaking earnestly pursued? 
2. Is the activity an occupation or function, which is actively pursued with reasonable or recognisable continuity? 
3. 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.) 
4. Is the activity conducted in a regular manner and on sound and recognised business principles? 
5. Is the activity predominately concerned with the making of taxable supplies for a consideration? 
6. 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? 


Sole Proprietor With More Than One Business

When a sole proprietor registers for VAT they often make the mistake of thinking that they are only registering one particular business activity.  This is not the case, with a sole proprietor it is the person who is registered and every business activity is covered by the VAT registration.  So, for example, if you register for VAT because your turnover as a plumber is over the VAT registration threshold but you also do building work and charge customers for it on a regular basis then this is part of your business and you have to account for VAT.

What if it’s a Hobby?

If an activity is a genuine hobby you need not charge VAT on any income from it or claim back any related VAT.  For example, our plumber likes to do up old cars and then sells them on after he has driven them around for a short while.  It takes about 18 months to do up the old cars in his spare time. He then sells them on making a couple of hundred pounds profit.  He should be able to argue that this is a hobby because it fails 1-5 of the tests from Lord Fisher so that he does not have to charge VAT, at the same time he can’t reclaim the VAT on the spares he buys.


Practical Tip

In some cases a person may not even be VAT registered and still attract HMRC’s interest.  Take the man who collected china ornaments over many years.  He decided to sell off a lot of his collection on E-Bay to help finance his retirement.  HMRC has software that monitors ‘traders’ on E-Bay and they decided that his ‘turnover’ was over the VAT registration threshold and he should register for VAT.  The case went to Tribunal and the collector was able to prove that it was not a business but only a hobby even though he had a large volume of sales as he disposed of his collection.


By Andrew Needham