A business regularly hosts networking events at a hotel, charging £30 per delegate for light refreshments and the travel costs of a guest speaker. They don’t charge output tax as all events make a loss but input tax is claimed on the costs. Is this correct? VAT expert John Craig explains in this article.
There’s a common misunderstanding that you do not charge output tax on supplies where a loss or deficit is made. This is incorrect. The key question to consider is:
Am I making a supply of goods or services in the course or furtherance of a business activity?
If the answer is yes, then the income received is subject to VAT, assuming the supplies are standard-rated. The loss-making outcome is irrelevant.
For example, a business might sell some goods below cost price to attract customers into a shop to spend more money. Supermarkets often refer to these items as “loss leaders” but they are still subject to VAT in the same way as profit-making goods.
Two business tests
If you have doubts about whether income you receive is subject to VAT as being relevant to a business activity, then HMRC’s two-stage strategy should guide you to the correct answer. These two new tests were introduced in 2022 following some recent tribunal cases and you must consider the questions separately:
STAGE 1. Does the activity result in a supply of goods or services for a consideration, i.e. payment is received from a third party? If the answer is “no”, there is no business activity or supplies being made and you don’t need to account for VAT.
STAGE 2. Is the supply being made for the purpose of obtaining income? If the answer is “yes” then VAT is payable on the money received, assuming it is standard-rated.
You must consider each activity on a standalone basis rather than for your organisation as a whole. This is particularly important for charities, where there are typically some business activities such as a charity shop to raise funds and some non-business activities, e.g. a service which provides homeless people with free clothes and meals. In the example above, it could be argued that the business could answer “no” to both questions. However, this would be incorrect for the following reasons:
The delegates are coming to the events because they are gaining significant benefits, i.e. food, drink, an entertaining speaker, and the chance to meet other people in the same trade. The answer to Stage 1 is therefore “yes”.
Although the £30 fees are not sufficient to produce a breakeven or profitable outcome, the purpose of the receipts is to help the business recover some of the event costs. The answer to Stage 2 is also “yes”.
However, the business has underpaid output tax on past VAT returns and should correct this error for the last four years. The underpayment will hopefully be less than £10,000 so it can be adjusted on the next return rather than separately disclosed to HMRC. There is no issue with the input tax claimed, as this relates to taxable supplies.
The historic sales will be treated as VAT inclusive, i.e. output tax underpaid is £30 x 1/6 rather than £30 x 20%.
The business in the example above is making a supply of business services to the delegates, so must account for output tax on the receipts. They should correct past underpayments for the last four years. The input tax claimed is correct and does not need to be adjusted.
For other VAT related queries please do contact the expert team at JRW.