When considering if a hobby has become a business, unusually for VAT purposes, HMRC’s manual VBNB27000, recommends considering the income tax implications and states:
‘When judging whether a hobby should be seen as a business activity you should consider whether the activity is taxable for income tax purposes. The Income Tax (Trading and Other Income) Act 2005, Part 2, Chapter 2, Section 5 states that: Income tax is charged on the profits of a trade, profession, or vocation. This is a similar provision to the VAT definition of business in VAT Act 1994 Section 94(1) which includes “any trade, profession or vocation”.
If it is treated as business for income tax, the high likelihood is it will be business for VAT as well. For completeness, the VAT Business Test can be found here.
However any prize money your client receives would be outside the scope of VAT. It is not consideration for any supply and is regarded as a gift to the winner as it not a guaranteed payment.
Payments which are made as appearance and participation fees, do constitute consideration for supplies and are standard rated where the place of supply is the UK. There is a consideration because the client would have to take part in a competition in return for payment.
Furthermore, VAT Notice 701/41 confirms ‘allowing the sponsor to use your name or logo’ is a standard rated supply. It is deemed the sponsor will benefit from this arrangement, for example, using the clients name or image for advertising/marketing campaigns.
In summary, sponsorship, appearance, and participation fees are taxable supplies and attract the standard rate of VAT once registered. If supplying these services to overseas business customers, then please refer to the Place of Supply of Services VAT Notice 741A. If the recipient is established for business purposes outside the UK, the services will be outside the scope of UK VAT. Prize money received is outside the scope and this would not form part of his taxable turnover when considering the need to register for VAT.
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