VAT: Rowing with the tide
Swanage Sea Rowing Club won its VAT case about zero-rating the building work on its new boathouse, much to Neil Warren’s surprise.
It is well known that builder services supplied to a charity can be zero-rated if they relate to a new building that will be used solely for a relevant charitable purpose, eg a place of worship. To qualify the zero rating the building should not be used for any business supplies, only for the good causes and activities of the charity. There is a 5% de minimis exception for business use (VAT Notice 708, para 17.11).
A condition of zero-rating is that the charity must issue a certificate to the builder, meeting the conditions laid out in VAT Notice 708, section 18. HMRC can issue a 20% penalty to a charity if it issues an incorrect certificate. This is the same amount as the ‘lost VAT’ caused by incorrect zero-rating.
The issue in the case of Swanage Sea Rowing Club (TC7904) was whether the new boathouse built to house its boats qualified for zero-rating.
HMRC said ‘no’ because the charity collected annual subscription fees and rowing session charges of about £8,000 per year, which was classed as business income.
The tribunal agreed with HMRC. The taxpayer claimed it had a ‘reasonable excuse’ for issuing a zero-rated certificate to the builder because it had discussed the VAT issues with HMRC’s Charity Helpline, and was convinced the work should be zero-rated. If this argument held, the penalty issued by HMRC should be withdrawn.
HMRC telephone call
The charity officers were convinced that the subscription charges did not qualify as business income, being more akin to donations from members.
This argument was bizarre. The confusion continued when the club secretary telephoned HMRC’s Charity Helpline and had a brief five-minute call with an officer to discuss the project. The call was not recorded by HMRC and the tribunal only learned about the likely outcome, based on the training of HMRC officers dealing with such queries. It was all very muddled.
The charity lost the argument that the building was not used for business purposes, and the building did not qualify as a “village hall or similarly” where zero-rating could also apply.
However, the reasonable excuse argument was successful. The FTT found the behaviour of the club’s officers had been: “objectively reasonable in the circumstances” considering their experience and knowledge of tax matters. The appeal was allowed and the penalty was withdrawn.
The charity officers apparently read HMRC’s VAT Notice 708 and decided there was no business use of the new building, despite the fact that para 14.7.3 includes the specific example of a business project being one where membership fees are charged and therefore building works are excluded from zero-rating. I suppose they did not think this paragraph was relevant if the annual subscriptions of £120 paid by rowers were donations.
There was a reference in the report to a committee member speaking to a work colleague who knew about VAT, but no formal professional advice was taken. It also seems strange that HMRC’s Charity Helpline only needed five minutes to resolve a difficult query to the taxpayer’s satisfaction.
Lessons to learn
There are two main learning points:
1. What is a business
In the VAT world, an activity doesn’t have to be profitable to be classed as a business. If in doubt, the six questions known as the “Lord Fisher tests” are still valid – see HMRC VAT Manual VBNV21000.
2. What is business income
Some advisers think that a new charity building only has business connotations if there is either a bar or coffee shop involved. This is incorrect – the Swanage Sea Club boathouse had neither but was still deemed to be a building that had business activities because of the subscription income and rowing charges.
The taxpayer worked hard for this victory, so well done to their representatives, but another charity with the same facts may not be so lucky.