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The VAT system is policed by HMRC who can and do levy penalties for breaches of the legislation.
There are four conditions that must be satisfied in order for an activity to be within the scope of UK VAT.
These conditions are that the activity:
The fourth point above is a condition that needs to be carefully considered when deciding whether an activity is within the scope of VAT. This concept of 'business' is one of the less well-known rules. However, this is an important condition that drives the decision should a business charge VAT on their sales, known as output VAT and on its ability to recover VAT, known as input tax.
The VAT concept of business is currently taken to be the same as the concept of 'economic activity' set out in European legislation. Therefore, if an activity falls within EU definition of economic activity it must be business in the UK. Both of these definitions are wide and, in some cases, have needed to be interpreted by the courts.