Neil Warren explains why a charity didn’t have a reasonable excuse for issuing an incorrect zero-rating certificate on its new building.
The Marlow Rowing Club (TC6803) case illustrates the difficulties the charity trustees had when reaching a VAT decision about a new building when a similar case was in the middle of litigation.
Marlow Rowing Club was a charity which was not VAT registered, so it couldn’t claim input tax on its costs. When it constructed a new ‘watersports hub’ that also included a gym for use by non-club members, it issued a VAT certificate to its builders to obtain zero rating on the construction services and materials (VATA1994, Sch 8, Group 5). Zero rating applies if a new building is to be used by a charity for its charitable (non-business) activities.
The business use dilemma
Many tribunals have been occupied by the issue of whether a token or reduced charge for using a facility is classed as business use and therefore prevents zero rating on the builder’s services. HMRC usually says this is business use.
There was a glimmer of hope for charities when the first tier and upper tribunals ruled that subsidised pricing and the use of volunteer labour meant there was no business use at a new building constructed by Longridge on the Thames (EWCA Civ 930). However, the taxpayer joy was short-lived because the Court of Appeal overturned the two favourable rulings of the lower courts and found in favour of HMRC.
The Marlow trustee committee had a dilemma because its new building project started before the Court of Appeal heard the Longridge appeal. Having taken professional advice, the committee issued a VAT zero-rate certificate to the builder, knowing this was contrary to HMRC’s interpretation of the law. The builder, therefore, zero rated his services, but HMRC instead collected the VAT by issuing a penalty against the club.
Marlow accepted (post-Longridge) that the work was standard rated because the charging arrangements for the gym represented business use, but it argued that it had a ‘reasonable excuse’ for issuing the certificate because of the two earlier tribunal wins for Longridge. The Longridge project was very similar to that undertaken by Marlow.
HMRC made great play of the action that would be taken by a ‘reasonably conscientious businessman’. HMRC argued that Marlow should have notified it of the action the charity had taken and asked HMRC to issue a protective assessment pending the outcome of the Longridge appeal. A ‘reasonably conscientious businessman’ would not have issued the certificate without going down this route. The court agreed with HMRC and dismissed the appeal – there was no reasonable excuse for the issuing of the incorrect VAT certificate.
The tribunal decision was clearly correct but I feel sympathy for the trustees who had a tricky dilemma. They wanted to get the best VAT result for the Charity but this relied on the optimistic view that the Longridge success in the courts would continue.
My key tip is that it is unwise for any charity to adopt a stance that is contrary to HMRC’s interpretation of the legislation, even where professional advice suggests otherwise.
I am still contacted by a cricket club I used to play for about 20 years ago, not to resurrect my bowling career, but to give them a VAT steer on their latest project. My answer usually confirms that the club will have to pay standard-rated VAT on its expenditure with no scope for recovery because it is not VAT registered. The committee’s argument usually fails at the first hurdle because the club is not even a charity.
As a final tip, always remember that charities and not-for-profit organisations don’t get special VAT treatment. They only qualify for certain concessions in the legislation if strict conditions are met.
About Neil Warren
Neil Warren is an independent VAT consultant and author who worked for Customs and Excise for 14 years until 1997.