It’s a fairly common misconception that charities do not pay tax; this may be true in general for corporation tax but from a VAT perspective charities pay VAT on the majority of their costs and generally are unable to recover that VAT from HMRC. There are some reliefs available though, perhaps the most beneficial being the ability to zero rate the construction or purchase of buildings that are used for a relevant charitable purpose (RCP buildings). Given that buildings can cost a lot of money and any VAT charged is generally not reclaimable, this represents a significant saving where the building qualifies.
As a reminder, a RCP building is one which is either:
- Used by a charity for its non-business purposes; or
- Used as a village hall or similar.
As one would expect, HMRC set out conditions for what qualifies for the relief and enforce these where appropriate. Besides the ‘use’ conditions, which I will not detail here, there is also a condition that requires the charity to issue a certificate, confirming it meets the requirements. It is important that the charity takes reasonable steps to ensure a certificate is appropriate and, equally, the certificate should not be taken at face value by the contractor or vendor; checks should be undertaken by them to ensure that it is correctly issued. From the contractor or vendor’s risk perspective, if the VAT treatment is incorrect and reasonable checks on the validity of the certificate have not be undertaken, HMRC may recover from them the VAT that should have been paid. Alternatively - and potentially in addition - there is a penalty of 100% of the VAT that would have been due which can be charged to the charity for the incorrect issue of a certificate. HMRC have publicly stated that they will not issue a penalty if the charity has a reasonable excuse for issuing it, which in essence means that it must have applied care and appropriate due diligence. It is important to understand that the penalty is not VAT and so if a penalty is issued it represents a real cost – if VAT was charged the charity can sometimes recover some of the VAT but where a penalty is payable instead of VAT, it cannot be recovered.
For this reason, charities usually take professional, specialist VAT advice before issuing certificates and the cases of penalty action if that happens are generally rare. However these concepts have been considered in two recent Tribunal cases; Marlow Rowing Club (“Marlow”) and Greenisland Football Club (“GFC”).
In Marlow the club issued a certificate for construction of a building after seeking Counsel’s opinion. Initially Marlow argued that the certificate had been correctly issued but subsequently withdrew that argument and instead argued that there was a reasonable excuse for issuing the certificate. Counsel had advised that, following the First Tier Tribunal case of Longridge on the Thames (“Longridge”), the club should be able to issue a certificate but that the case was being appealed and, if HMRC were successful in that appeal, the position could be different. HMRC argued that, given the fact that Longridge was undecided, Marlow should have sought “advice” from HMRC. The Tribunal agreed, ruling that the correct course of action should have been to seek a ruling from HMRC and appeal that, pending the conclusion of Longridge, if applicable. Accordingly it held that there was no reasonable excuse for the incorrect issue of the certificate.
In GFC the club issued a certificate after researching the guidance provided by HMRC and seeking professional advice. Similar to Marlow, the club did not consult HMRC. HMRC argued that the certificate had been incorrectly issued and imposed a penalty. GFC appealed to the First Tier Tribunal which held that the certificate was correctly issued on the basis that the due diligence undertaken was that expected of a reasonable person. It also stated that, if it was wrong and the certificate had been issued incorrectly, there was a reasonable excuse for issuing the certificate. HMRC appealed that decision to the Upper Tribunal where the Judge held that the certificate had been incorrectly issued but that GFC still had a reasonable excuse for issuing it so the penalty should be withdrawn. In particular, in relation to consulting HMRC, the Judge made the comment that there is nothing in HMRC’s guidance which states that a taxpayer should seek advice from HMRC. A taxpayer should be entitled to rely on published guidance and professional advice.
These cases slightly contradict each other but it is clear that care has to be taken on issuing certificates. No two cases will be the same and will succeed (or not) on their own merits. As a seasoned VAT adviser I find it interesting that HMRC should suggest that, in all cases, “advice” should be sought from HMRC. HMRC insist they do not give advice; more often than not they don’t even answer the question asked, particularly where they consider there is no ambiguity in their published guidance. Where they do provide answers they take a long time and are often vague or incorrect. Yes, you can appeal their answers but, whilst appealing decisions will get the right answer at some point, the process takes a considerable length of time and is costly (the certificate in Marlow for example was issued in 2013, the appeal decision was released in 2018). A certificate has to be issued at the time of construction and it is not helpful to have to wait a considerable length of time to establish the answer from a court of law. This is, of course, not an excuse. In all cases, research has to be undertaken, including taking advice if appropriate and we would recommend an record is kept of the decisions made so that, if HMRC do challenge the treatment, either the VAT liability itself or the issuing of the certificate can be robustly defended.
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