16 Nov 2018

Up the creek without a paddle

This week’s batch of VAT case reports had a common theme:- penalties. VAT penalties fall into two general categories; those where the level of penalty due depends on the taxpayer’s behaviour, and those where the penalty is automatic and is wholly due unless the taxpayer has a reasonable excuse.

An analogy for the latter is the fine for pulling the alarm chain on a train to apply the brakes. There is a swingeing fine unless you had good cause.

In one case released this week, involving Marlow Rowing Club, I think HMRC and the Tribunal set the bar too high for demonstrating a reasonable excuse.

The context is that a charity doesn’t have to pay VAT on the construction of certain qualifying buildings. A key condition is that the charity issues a certificate that it will use the building solely for “non-business” purposes.

If an incorrect certificate is issued, the charity is liable to a penalty equal to the VAT saving. No penalty is due if there is a reasonable excuse for the error, but otherwise there are no reductions, e.g. for making a full, unprompted disclosure.

So if the certificate turns out to be incorrect, the penalty is either 100% or 0%, depending on whether it was reasonable for the certificate to be issued.

A particular issue is that HMRC have always interpreted “non-business use” narrowly. Over the years, HMRC lost several cases in the Courts, until finally succeeding in the Court of Appeal case of Longridge on the Thames.

At the time Marlow issued its certificate, it had a good case that it was entitled to do so, based upon caselaw up to that point. Among other things, HMRC had just lost the first hearing of the Longridge case. As this concerned a fellow watersports charity based nearby, Marlow was well aware of it.

Aware also that HMRC disapproved of the decision and would Appeal, and of the potential penalty for issuing an incorrect certificate, Marlow decided to take Counsel’s Opinion before issuing a certificate, and consulted the QC representing Longridge.

Counsel advised that if HMRC lost its Appeal to the Upper Tribunal in Longridge Marlow would be justified in having issued the certificate.

Marlow could not afford to wait until after that hearing, as the Certificate had to be issued before the work was done. The Trustees decided they were at risk of not fulfilling their duties if they did not issue a Certificate, but Longridge was successful.

Marlow then sought a further Opinion from Baker Tilly as to whether there were further actions to minimise any risk of issuing the Certificate.

Eventually, HMRC won the Longridge case in the Court of Appeal. Marlow accepted that its situation was sufficiently similar as to mean that the building work should have been subject to VAT. Presumably, its builder subsequently charged VAT which Marlow paid, and HMRC received that VAT.

But HMRC then levied a penalty because Marlow had issued a certificate which turned out to be incorrect. Marlow’s Appeal to the Tribunal that it had a reasonable excuse was rejected. Despite all the advice it had taken, The Tribunal Judge decided Marlow hadn’t done enough to justify issuing the certificate.

I do hope this case is further Appealed, because it looks to me as if the Tribunal has substituted its own view of what steps it might have taken in the shoes of Marlow’s Trustees, rather than considering whether what Marlow did was reasonable. Not least because I don’t agree with all of what the Tribunal described as that ideal action.

In particular. HMRC argued, and the Tribunal accepted, that Marlow should not have sought an Opinion from Longridge’s QC because of his involvement in such a similar case. Marlow should, however, have consulted HMRC, even though HMRC were vigorously defending a clear policy to the contrary and persisting despite defeats not just in the first two hearings of Longridge but in several earlier cases.

The tribunal seems to have assumed that a protocol could have been agreed with HMRC to protect both parties’ interests pending the final outcome of the Longridge litigation.

This is notwithstanding that neither Counsel nor Baker Tilly suggested this course of action. In my experience, HMRC would be likely to simply point to its published guidance, and decline to engage in any further discussion. In a previous blog I have commented on some limitations of HMRC guidance.

One thing is for certain. A taxpayer does need to take full advice before engaging on any significant transaction, especially in a contentious area.

If you would like to discuss this or anything else, please call Steve Chamberlain on 01225 472800 or send him an email.