A lesson here for anyone faced with deciding when to issue VAT zero-rating certificates.
As shown in the case here, issuing qualifying use certificates on new buildings when you shouldn’t is bad news, you simply cannot be too careful.
Aside from building new houses there are two other situations where VAT zero-rating might apply to construction, both of which require the customer to issue a qualifying use certificate. Subject to rigid provisions these might be issued where a building is to be used for either a relevant residential purpose (RRP) or a relevant charitable purpose (RCP). If a certificate can be issued then the contractor can zero-rate the supply of building services, so the certificates are good news for those able to issue them.
What is difficult about both certificates is being sure about just when they can be issued, especially as the customer can be penalised for issuing a certificate when they should not have done so. This is precisely the situation that Marlow Rowing Club (TC06803) found themselves in after issuing a RCP certificate for the construction of a new water sports hub in November 2013. The case doesn’t mention any values so we don’t know the cost to the club, we only know that the First Tier Tribunal decided that the club did not have a reasonable excuse for having issued the certificate wrongly and as a result will be penalised.
By no means for the first time this case makes me feel sorry for the volunteers who had been faced with the decision of whether to issue the certificate in the first place. There were financial and tax professionals involved as club directors and members. While they sought advice from Counsel and the club’s accountants the tribunal decided they hadn’t approached the question correctly and therefore did not have a reasonable excuse for incorrectly issuing the certificate.
The club no doubt faced a real dilemma when having to decide whether to issue the certificate. At the time the now famous case of Longridge on Thames (centred on a similar argument) had won in the First Tier Tribunal in February 2013 but unfortunately for Marlow that decision was being appealed by HMRC. It was later decided in Longridge’s favour by the Upper Tier in 2014 but then in HMRC’s favour by the Court of Appeal (COA) in 2016 so of course back in 2013 Marlow had a real problem.
Had the club not issued the RCP certificate then VAT would have been charged at 20% with no way of reversing the cost if the final outcome of the appeal process found for Longridge. With a tribunal decision in Longridge’s favour perhaps the club thought the decision was in the bag. Unfortunately though the end result was the COA’s 2016 decision in HMRC’s favour leaving Marlow in the position of having accept it had been wrong to issue a RCP certificate. The only question was whether it had a reasonable excuse for doing so but the tribunal has decided not.
The tribunal decision centres on the facts that issuing the RCP certificate relied on Longridge succeeding and also that the club did not follow the accountant’s advice to advise HMRC of the position as soon as possible rather than wait for questions to be asked. The tribunal accepts that the club may not have been advised of this alternative but nevertheless considers a better approach would have been to obtain HMRC’s approval and then appeal any disagreement. This could then have stood behind the Longridge case and kept the club protected from any risk of penalty. Food for thought indeed.
Knowing when to issue VAT zero-rating certificates is never going to be easy. If you’re ever not sure about VAT related then please give us a call. Remember sooner is always better.