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Cricket club caught out by charitable VAT rules

Westow Cricket Club was bowled a penalty of £20,937 for incorrectly interpreting the zero-rating rules on the construction of buildings used for charitable purposes. HMRC was also criticised by the FTT for not giving the club a definitive response to its query

17th Jan 2020
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The penalty was the equivalent to the VAT that should have been paid over to HMRC had a zero-rated certificate not been handed to Westow’s builder.

Asked for help

Westow is a local club run by members with no paid staff, but it is not a registered charity and therein lay the problem. It is a registered Community Amateur Sports Club (CASC) under the Corporation Tax Act 2010, s58.

Having raised funds to build a new pavilion and sports hall it wrote to HMRC seeking advice on the zero-rating of the construction costs.

HMRC advice

HMRC pointed Westow towards the VAT Notice 708: Buildings and Construction highlighting that a definitive response could not be given as this was standard HMRC policy.

Had HMRC simply left it there at least the taxpayer would have been left to make its own interpretation. But maybe the officer thought that he would be helpful by including the words “provided the new pavilion meets the conditions set out, and it appears to do so, the construction work will be zero-rated for VAT purposes”.

This was good enough for the taxpayer who decided that paragraph 14.7.4 of Notice 708, as indicated by the HMRC officer, fell within its favour and issued the zero-rating certificate.

However, zero-rating is only available where the building in question is used by a charity for a relevant charitable purpose, defined as not in the furtherance of a business or as a village hall, or similarly a local community recreational facility. Westow was not a charity and therefore fell at the first hurdle.

Tribunal hearing

At the first-tier tribunal hearing (TC07484) Westow argued that it had a reasonable excuse. This was dismissed, as although the FTT was critical of HMRC’s approach in that on one hand it said its policy was not to give a response, but on the other it gave an opinion that in this case the taxpayer ran with. The tribunal said that this approach could leave a taxpayer in no-man’s land.

The key here was that despite this the taxpayer failed to understand that as a CASC it did not automatically meet the charitable terms, and issuing a certificate and using its CASC registered number instead of a registered charity reference was incorrect.

Rough justice

I have much sympathy with this taxpayer, it clearly felt that HMRC had led it to make the decision it did with its positive response on zero-rating. The club presumed HMRC understood its charitable position, but the tribunal found it could not offer any mitigation despite this and dismissed the appeal.

Had the taxpayer sought professional advice at the outset things might have been different, although we don’t know the background as to why the taxpayer registered as a CASC but presumably this was to mitigate on business rates and profit from social trading activities.

The legislation covering this area does not use the term ‘registered charity’ but rather use by a charity for a charitable purpose. However, my hunch is that the likelihood of the bar and catering facilities at the club, as well as property hire, would have sunk any such argument.

Comment

One of the bugbears in dealing with HMRC in recent years is the approach taken in answering queries. To compound matters, HMRC has made things more difficult for taxpayers and their advisers, by applying a policy of not giving out rulings, and instead referring to VAT notices when answering such written approaches.

This has often led to a cat and mouse game for advisers where they seek to present an argument that HMRC cannot refute, except that in response HMRC officers simply refer to the relevant public notice, even though the issues at stake are often complex. If professional tax advisers who are supposed to know their stuff struggle, pity the poor taxpayer.

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