CVC client wins case before Tribunal – construction of clubhouse is zero-rated

Constable VAT Consultancy LLP (CVC) is pleased to report that our client, the registered charity Greenisland Football Club (GFC), has successfully won its appeal against the issue of a VAT penalty assessment by HMRC in the First Tier Tax Tribunal (FTtT). GFC and CVC would like to thank Tim Brown of Temple Tax Chambers who represented the charity at the hearing in Belfast.

1. Background

In 2010 GFC commenced an ambitious project to construct a clubhouse which it intended would be a multi-purpose facility for use by the local community.

In 2011 the charity issued a zero-rating certificate to the appointed contractor. The certificate was issued on the basis that the building would be used for a relevant charitable purpose (RCP) as a village hall or similarly in providing social or recreational facilities for a local community. GFC is not VAT registered. VAT incurred on construction works would have been an absolute cost to the charity.

GFC fulfilled its original intention. Since its construction the building has been enjoyed by various community groups and local people.
HMRC carried out a targeted and proactive campaign in 2014 when it wrote to numerous charitable sports clubs. HMRC sent a standard seven question letter to a range of sporting clubs in the UK. HMRC clearly feels that many sports organisations have benefitted from zero-rating when they should not have done. Some clubs are not registered with the Charity Commission which may be problematic for such organisations when seeking zero-rating.

In 2014 HMRC issued a penalty assessment on GFC in the sum £53,101 on the basis the building did not satisfy the RCP test. The decision to raise the penalty assessment was upheld on review by HMRC in 2015 and the charity appealed HMRC’s decision.

The case was originally listed to be heard on 8 January 2016. A few weeks before the hearing HMRC applied for the case to be stood over pending the decision in Caithness Rugby Football Club (Caithness) which was under appeal to the Upper Tribunal (UT). HMRC subsequently lost Caithness but then applied for GFC’s case to be stood over behind HMRC’s preferred new lead case. Due to the amount of time GFC’s appeal had been taken to be heard, and the uncertainty impacting adversely on GFC’s charitable activities, GFC opposed HMRC’s request. The Tribunal refused HMRC’s application. This allowed GFC to proceed to Tribunal last month.

2. GFC’s position

The charity’s position is as follows:

  • GFC is a registered charity recorded on the charity register.
  • The building it constructed is not a village hall but it is similar to a village hall and used as such.
  • The charity’s intention prior to construction was that the building would be a facility which would be used by the wider community and not just GFC.
  • The charity’s original intention has been demonstrably fulfilled. The facility has been used by a range of community groups giving the local population access to a wide range of activities they would not previously have had an opportunity to partake in.
  • The building is available for use on a ‘first come first served’ basis.

3. HMRC’s position

  • Sports clubhouses are ‘dual purpose buildings’ and are not used ‘similarly’ to a village hall because such facilities are used by a) the club and b) the local community.
  • Only use by the community qualifies for RCP use and this does not include use by a local sports club, even though a local sports club is inevitably part of that local community.
  • If a decision on hire and bookings is at the club’s discretion the facility cannot be said to be ‘similar’ to a village hall (i.e. ‘first come first served’) because use is not at the direction of the local community but GFC.
  • The term ‘similarly’ means similar to the way a village hall operates i.e. the trustees or committee of a village hall would be made up of individuals from various local groups and clubs.
  • The renting out of a facility to a variety of local groups or members of the community by a charity, or the provision of social and recreational facilities by a charity, does not necessarily mean that zero-rating applies to the construction of a new facility.
  • HMRC also suggested GFC was using the clubhouse for business purposes because it charges adult members a subscription and the parents of junior members pay fees to cover costs such as purchasing equipment.

4. Decision

The Tribunal found that GFC was correct to issue a zero-rating certificate to the contractor. The Tribunal also found that, had it reached a different conclusion on this entitlement, the charity had a reasonable excuse for issuing the certificate. The appeal lodged covered both issues. This, the reasonable excuse point, is something which we would recommend any club involved in a dispute with HMRC considers. GFC had read HMRC’s VAT public notices and discussed the matter with professional advisors.

5. Overview

For a number of years now it has been difficult to be certain when HMRC will accept sports pavilions/clubhouses are intended to be used ‘similarly’ to village halls. The UT in Caithness Rugby Football Club (Caithness) and New Deer Community Association (and now the FTT in this case) do not accept the majority of HMRC’s interpretations set out in either VAT Notice 708 (buildings and construction) or HMRC internal guidance manuals.

HMRC appears to have a two pronged strategy in attacking zero-rating in GFC and similar cases.
Firstly, the management of the building should be vested in a committee that represents a number of community groups. This approach has not been supported by the UT.

Secondly, HMRC believes there is a difference between a charitable sports club’s use of a facility and the community’s use of that same building. This ‘dual purpose’ argument means a distinction should be drawn because the two uses are different and are not both RCP. The use by the club, according to HMRC, is not RCP. This seems an unreasonable argument when considering that members of local sports clubs are very likely to come from their local community. It is difficult to view amateur sport as anything other than a recreational activity, as contemplated by the zero-rate provisions.

Viewing the Hansard entries dated 12 July 1989 (Value Added Tax: Buildings and Land Volume 156 1036-63) Peter Lilley, the then economic advisor to the treasury, is recorded as saying in Parliament when referring to this matter “the amendment therefore seeks to reinstate for the construction of charitable community buildings the zero-rate which was abolished on 1 April as a consequence of last year’s court judgment”.

Mr Lilley went on to say “the amendment is confined to buildings run by charities. It covers church halls, village halls and other community buildings providing similar social and recreational facilities for a local area. It also extends to buildings such as cricket pavilions and changing rooms, constructed for charitable playing fields and recreation ground associations”.

When Mr Lilley was questioned on the application of the zero-rate he responded as follows: “The Honourable Member for Wrexham (Dr Marek) asked me to clarify the definition further and asked in particular whether it would include sports halls. For those sports halls that are both charities and run for the benefit of the local community, the answer is yes, they will be included, as they come under the general heading of providing recreational facilities”.

It is disappointing that HMRC is actively pursuing voluntary organisations whose members and supporters devote so much free time and effort to help their local communities. This not only seems at odds with VAT law but also what Parliament intended that law to include. The majority of people volunteering do their very best to satisfy all of the many regulatory requirements necessary when operating a not-for-profit sports club, including VAT. Such organisations are usually very small with a low turnover in terms of income generated. The activities of these clubs may mean that committee members or Trustees take personal financial risks in return for their endeavours. HMRC seems to consider that it is justified in investing large sums of taxpayer’s money trying to prevent such organisations benefitting from a relief that is quite clearly intended to apply.

If you are involved with a charitable or not-for-profit sports club or association (or any other charity) and are in dispute with HMRC over a technical VAT matter or interpretation of VAT law please do not hesitate to contact CVC. We would be pleased to help.