My briefing on the severe potential consequences of the Court of Appeal decision in Longridge on Thames, asked whether there were circumstances in which the old ‘Fisher’ tests would ‘have a role’ in helping charities argue that their activities are non-business, thus qualifying for the construction zero rate for new buildings.

The First tier Tribunal case of Gravel Road Records Limited (TC05598) appears, in a round about way, to suggest that there are.  This briefing covers how this case could affect charities.

This case related to a recording studio activity which was not charitable.  This venture failed and closed after HMRC had reimbursed input tax on the facility’s construction.  HMRC sought to recover the VAT payments on the basis that this was never an economic activity.  (A failed business venture would keep the  VAT, as failure is not an issue.  The question was solely as to the intention behind the venture in the first place).

It is interesting to see how HMRC sought to argue that there was no economic activity. The case was heard on 5 October, long after the Court of Appeal gave its Longridge decision, and years after HMRC had determined that the Lord Fisher tests needed to be superseded.  But HMRC nonetheless based its entire case on the Fisher tests, and there was no mention made of Longridge.  (The appellant would not have done, as he was a litigant in person.  The key point is that HMRC did not look to the latest jurisprudence to argue their case.)

It is also worth noting that HMRC’s advocate was a member of their Solicitors Office, so this cannot be classed as a ‘outlier’, such as where a VAT officer has taken a case which ought not to have passed legal scrutiny.

We can only deduce one thing from this – HMRC sees the Fisher tests as still being relevant.  What’s sauce for the goose must also be sauce for the gander.

This case dealt with an allegation that the recording studio was a hobby, and not a business.  A charity will never run a hobby.  However, HMRC advanced no evidence of actual hobby use of the facility, and seemed to rely only on it not being run as a business in the respect of the classic Fisher tests.  Each test was reviewed and compared with the appellant’s situation.  There was no allegation of a sham.

The appellant won on the facts.  His was a failed business venture.  But the point for us is that HMRC saw a small operation as being potentially defeatable by the Fisher criteria, despite the trenchant criticism of them in Longridge.  This reinforces the view that these old tests are relevant in cases where a charity can point to a small-scale operation where the intentions are more altruistic and charitable than commercial.

Graham Elliott is Technical Adviser to the Charity Tax Group