Case: Incorrect VAT certificate penalised
Judge Anne Fairpo
Decision released on 7 November 2018
Value added tax – Zero-rating certificate – Whether reasonable excuse for issue of incorrect certificate – No – Value Added Tax Act 1994 (VATA 1994), Sch. 8, Grp. 5 – Club’s appeal against penalty under VATA 1994, s. 62 dismissed.
Marlow Rowing Club  TC 06803
The appellant Club constructed a “Water Sports Hub” building (1) for use by itself and other local clubs and (2) to provide a gym facility, for which it offered membership to non-club members. The Club issued a zero-rating certificate on the basis that the building was intended to be used for a relevant charitable purpose, otherwise than in the course or furtherance of a business.
HMRC assessed a penalty under VATA 1994, s. 62 for issuing an incorrect certificate.
The FTT considered whether the Club had a reasonable excuse for issuing the certificate.
The Cub argued that it had a reasonable excuse for issuing the zero-rating certificate for the following reasons:
(1)the Club has some financial and tax professionals as directors and members of the committee that made the relevant decisions throughout the process;
(2)the Club took further advice from VAT professionals and was satisfied that all relevant detailed HMRC guidance had been reviewed and taken into consideration;
(3)the Club was aware of the judgment of the Court of Appeal in Longridge on the Thames v R & C Commrs  BVC 33, particularly as the Longridge activity centre is close to the Club. The Club was aware that that decision was not consistent with HMRC’s stated policy. Thus, it instructed Roger Thomas QC, who had acted as counsel for Longridge, in order to obtain advice from an authoritative source as to whether the facts and circumstances would enable the Club to benefit from zero-rating for the part of the building that the Club considered would be used otherwise than in the course or furtherance of a business;
(4)as counsel’s opinion was that there seemed to be good grounds for concluding that, if Longridge survived on appeal, the Club could issue a zero-rating certificate in relation to that part of the building, the Club concluded that the opinion meant that it was proper to rely on a decision still progressing through the courts (the FTT released its decision in favour of Longridge on 28 February 2013, the Upper Tribunal released its decision dismissing HMRC’s appeal on 19 October 2014 and the Court of Appeal held in favour of HMRC on 1 September 2016); and
(5)the Club considered counsel’s opinion in detail and the relevant committee decided to proceed with issuing the zero-rating certificate on 4 November 2013, i.e. before HMRC’s success at the Court of Appeal.
Thus, the Club submitted that:
(1)it took all reasonable steps to obtain assurance that it could validly issue the zero-rating certificate; and
(2)it would not have been reasonable to approach HMRC for guidance, given that it was already known and acknowledged that the issuing of the certificate was inconsistent with HMRC policy.
At the FTT hearing, the Club further submitted that:
(1)NA Dudley Electrical Contractors Ltd  TC 01124 demonstrates that the ordinary meaning of the phrase “reasonable excuse” should apply, including all the circumstances, such as the complexities of the law (Barrett  TC 04514). Also, Malin  BVC 1,554 indicated that, if it was not reasonably obvious why the law was as it is, that law should be regarded as complex. The cases of Weldon-Hollingsworth  BVC 4,103; No. 13,248, Standing Conference of Voluntary Organisations  BVC 4041; No. 17,827 and Saint Benedict’s School  BVC 1,429 all indicated that a taxpayer could have a reasonable excuse for making an error where the relevant law is confusing;
(2)when the certificate was issued, it was not clear who could claim zero-rating and how it applied. In addition, the overall circumstances should include the fact that Club was run by volunteers, so that it should be considered to be more of a cost-sharing arrangement rather than a business as such;
(3)a genuine honest mistake belief can be a reasonable excuse;
(4)in addition to advice from counsel, the Club had sought advice from Baker Tilly/RSM accountants. The accountants had also been asked to review counsel’s opinion;
(5)the accountants had indicated two options were available to the Club, but both involved the issue of a zero-rating certificate. The committee had selected the option which apparently was simpler to operate;
(6)when it submitted the return, the Club believed that there was a strong case for zero-rating, on the basis of the decision in Longridge at the FTT. It was not “flying a kite” and was entitled to consider that HMRC’s policy was only an interpretation of the law. At the time, the Longridge decision indicated that the relevant law was open to other interpretations. The relevant HMRC Notice had the force of law only as to a small point, rather than the entire Notice;
(7)the Club had sought detailed advice and HMRC guidance acknowledges that accountants can be a good source of information as to tax law;
(8)it had not instructed counsel to obtained advice to confirm its views. When counsel was instructed, the Club did not know whether the Longridge decision would assist nor whether the Club would be able to rely on that decision. Initially, the Club had asked whether there was any prospect of success and only afterwards had asked for a full opinion;
(9)it would not be in counsel’s interests to advise that there was a reasonable prospect of success where there was no such prospect;
(10)another barrister would also have taken the decision in Longridge into account, so it was reasonable to ask someone familiar with the law in that area to advise;
(11)the Club had acted on counsel’s opinion, altering the plans to ensure that Club and business activities were conducted in separate parts of the building. Although they had not hived off any activities, this was because the gym facilities were considered to be the provision of a sporting facility within the charitable objectives of the Club. The gym did not provide classes or similar activities and was set up primarily to enable Club members to undertake supplementary training; and
(12)the Club had to decide whether to issue a zero-rating certificate at a specific point in time, as the legislation does not allow for deferral, and so the Club had had to decide on the likely outcome of Longridge. It could not wait and see whether Longridge succeeded in the higher courts.Mr Wood, the Club treasurer, provided the following oral evidence at the FTT:
(1) the club would have accepted an opinion that it did not qualify for zero-rating and had not requested the opinion in order to confirm its view;
(2) the Club had decided to take VAT advice in order to ensure that they could minimise the risk of any penalty, and Richard Thomas QC was the only logical choice, as he was an expert in the area of VAT law as it applies to charities and was familiar with the arguments concerning this type of case;
(3) the Club had obtained a second opinion from its accountants, after obtaining counsel’s opinion, in order to check as the original accountant’s opinion had not been clearly in favour of zero-rating;
(4) the Club had not registered in order to recover the balance of the VAT relating to business use, because it was considered that it did not have the manpower needed to deal with VAT compliance;
(5) he considered that, in correspondence, HMRC had accepted that a taxpayer could rely on decisions of the Upper Tribunal until these were overturned; and
(6) he considered that the Club had taken the only reasonable course of action available to it. If Longridge had succeeded on appeal and if the club had not issued a certificate, it would have been able to recover, at best, only a very small amount of VAT. The club volunteers have responsibilities as charity trustees and took careful advice. If they had not issued the certificate, and if Longridge had succeeded, they would be likely to have been considered not to be fulfilling their responsibilities as trustees.
HMRC acknowledged the efforts that the Club had taken to determine whether the certificate should be issued, but HMRC noted that the Club was aware that issuing the certificate contravened HMRC’s policy. HMRC submitted that a “reasonable conscientious businessman” would have sought advice from HMRC where there were conflicting views, particularly as the Longridge case, on which the decision was partly based, could have been appealed, as it in fact was.
Also, HMRC submitted:
(1)the Club’s initial advice had been that it was not eligible for zero-rating, although this advice was obtained before the FTT decision;
(2)the Club would have anticipated in advance what the advice from counsel would be, as they did not take advice from a person not already involved in a similar case;
(3)at the time that the certificate was issued, in November 2013, the Longridge case was under appeal and the appellant could not have known what the decision on appeal would be and so could not know that counsel’s caveat, that his advice was dependent on Longridge surviving in the higher courts, would be satisfied;
(4)another caveat in counsel’s opinion, that the non-charitable activities in relation to the gym were undertaken by a separate body, was not followed and so the appellant was not relying on counsel’s opinion. The gym was open to people without full club membership, outside the rowing community, and so was a business activity rather than a charitable activity;
(5)the Club’s submission that they sought a second opinion from their accountants is not relevant as that second opinion was given on the assumption that a certificate could be validly issued and did not consider whether the certificate could in fact be so issued. The second opinion was requested only on specific points, not to consider counsel’s opinion in general; and
(6)further, the accountants’ second opinion set out two options for the appellant and recommended the second option, in part because it would ensure that HMRC was aware of the appellant’s position at an early stage. The appellant chose to undertake the first option and so HMRC were not aware of the position until a routine check was undertaken.
The FTT used the test set out in The Clean Car Co  BVC 568:
“a reasonable excuse should be judged by the standards of reasonableness which one would expect to be exhibited by a taxpayer who had a responsible attitude to his duties as a taxpayer, but who in other respects shared such attributes of the particular appellant as the tribunal considered relevant to the situation being considered.”
Taking all the circumstances into account, the FTT decided that a trader in the Club’s circumstances would have considered in particular the fundamental uncertainty in counsel’s opinion, being the need for Longridge to succeed on appeal, and the accountants’ clear recommendation that HMRC be advised of the position at the earliest opportunity and taken further steps to determine whether HMRC would in fact disagree with their actions by ensuring that HMRC was aware of the position rather than wait to see whether HMRC checked the position. I consider that the trustees’ responsibilities could have been met by appealing any disagreement by HMRC and requesting that it be stayed pending the conclusion of Longridge. The Club was not directly informed by its advisers that this course of action was available, but neither was there any evidence that it had requested such advice.
Thus, as the Club did not take such further steps, the FTT held that it did not have a reasonable excuse for issuing the certificate. The Club’s appeal was dismissed, and the penalty was upheld subject to agreement as to quantum between the parties.
The Cub took professional advice from accountants and counsel as to whether it could issue a zero-rating certificate in relation to construction of a building which was at least partially to be used for charitable activities. The accountants’ advice was first sought before the Longridge decision was issued and indicated that the certificate could not be issued. Counsel’s advice was sought at a time when the relevant law was in some question, as the FTT had issued a decision in Longridge which appeared to support the view that the Club could issue the certificate, but that decision was under appeal to the Upper Tribunal. Counsel’s opinion that the certificate could be issued was stated to be subject to Longridge succeeding on appeal. The Club knew that (1) the Longridge decision was not final when it decided to issue the certificate and (2) its actions in issuing the certificate would be rejected by HMRC.
For commentary on reasonable excuse, see the Indirect Tax Reporter at ¶59-665.