The First tier Tribunal decision in the case of Swanage Sea Rowing Club (TC07904) provides further useful insights into the VAT position where a zero rate certificate is used in connection with a new construction project (which in this case was of a boat house).
The decision considers two separate points: whether the conditions for zero rating were met, and, if not, whether the charity had a reasonable excuse for issuing the certificate, which, if the case, would absolve it from paying the 100% penalty.
The tribunal rejected its case for meeting one of the tests to qualify for relevant charitable purpose use, namely as a ‘village hall’. However, this was because the building was to be used to store boats, which was not a use one would expect of a village hall. As regards the other relevant tests of usage, the tribunal was somewhat ambivalent. Accordingly, the decision could be helpful to charities, despite the failure of the argument for the appellant.
The tribunal also rejected the other test for relevant charitable purpose, namely that the charity was not conducting a business by reference to the building. Interestingly, the tribunal reviewed and applied the Lord Fisher tests which had come in for criticism in the Court of Appeal decision in Longridge on the Thames. This was because that Court had said that these tests could still have “a role to play”. Unfortunately, however, the tribunal viewed the outcome of this analysis as inconclusive, and so turned to the harder-edged Longridge test of ‘business’, and decided that the charity was a business under that test.
Interestingly, it was the Fisher test that the Court of Appeal had rejected (the ‘predominant concern’ test) which this tribunal believed the appellant had passed. However, and somewhat disappointingly, it also believed that the charity passed the test of not being involved in a supply that others commonly undertook as a business, and yet still decided to apply the Longridge test instead. This is unfortunate, since that particular test thereby appears to be weakened. There would appear to be some mileage (if an appeal were to be taken) in appealing this conclusion.
In particular, it is notable that, unlike with Longridge, the financial scale of this charity is very small, being around £10k turnover per year, which is much closer to the old Yarburgh case precedent which was held not to be a business. Yet the tribunal held that this was an irrelevant point in applying the ‘business test’.
Thus, having failed on the substantive point about entitlement to the relief, the case moved to the question of ‘reasonable excuse’ for issuing the certificate.
In this case, no professional advice was taken, but, unlike in other cases, HMRC’s enquiry line was contacted, and was understood by the charity to have confirmed that the certificate could be issued. There is no physical record of the advice given, but the charity’s witness statement was accepted by the tribunal, and HMRC’s argument that the testimony was questionable was not accepted. Critically, the fact that the advice was given only orally, in some haste, and without caveat, was considered by the tribunal to be no bar to the charity relying upon it. It did not accept HMRC’s argument that only written HMRC advice could be relied upon to be ‘careful’ in issuing a certificate.
On this last point one presumes HMRC will be tempted to appeal. The operation of an oral advice service runs the risk of hasty advice being relied upon, or misunderstandings of conversations arising. HMRC may decide that certain kinds of issue cannot be covered by such advice. The issue of proving what has been advised has subsequently been resolved by improved information technology, but that cannot solve the possible problem of five minute conversations giving rise to misunderstanding and error.
The potential disappointment regarding the decision on the ‘business test’ is the key issue arising from this decision, though the tribunal’s acceptance of the charity’s reliance on HMRC helpline advice sweetens an otherwise bitter pill.