VAT - Is my supply taxable?

It is sometimes beneficial to go back to basics and examine the fundamental tests that determine whether supply is taxable or not in the UK. In this article, we explore the four essential tests that serve as crucial indicators, offering valuable insights for businesses navigating the intricacies of the UK’s tax system.

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 or services are actually provided, there is no supply. Indeed, if there is no consideration (i.e. a form of payment) 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”. The definition remains slightly obscure, however, HMRC has provided some refinement of previous guidance on whether a supply is a ‘business’ or ‘non-business’ activity by answering some ‘business test’ questions

The previous tests were set out as long ago as 1981 and had 6 parts. The new test only has 2 parts:

1. Does the activity result in a supply of goods or services for consideration?
2. Is the supply made for the purpose of obtaining income?

So, if the two tests are passed a taxable supply exists. The next step is often to establish which VAT rate applies!

Related reading: How can I save business tax?

Specific examples of situations which are non-business activities include:

• Donations, hobbies and pastimes (although beware of falling foul of the 2 tests above),
• Certain free supplies of services,
• Certain grants or funding,
• Some compensation and some transactions which are specifically excluded from the tax by legislation, e.g. transfers of going concerns.

Related reading: How do I manage VAT?

It is often the case that the basic building blocks of the tax are overlooked or misunderstood, especially in complex situations. In those situations, it can help to “go back to the first page” and re-establish the foundations.

If you’re uncertain on the VAT status of your supply or would like further advice on your tax and VAT obligations, contact one of our team using the form below.