Update: The Upper Tribunal has reversed this decision in favour of Marlow Rowing Club – read an updated commentary by Graham here.

The case Marlow Rowing Club (TC6803) concerns a charity’s issuing of a certificate to enable a building contractor to zero rate construction.  The First tier Tribunal has been asked to consider whether that certificate was issued carelessly, the result of which determines whether a penalty is paid.  Penalties can be up to 100% of the tax due.

Unfortunately, the tribunal decided that it had been careless.  The circumstances are such as to possibly suggest that this charity’s circumstances may be widespread, rather than unique.

The charity now accepts that its use of the building would not be for relevant charitable purposes, and that therefore the relief would not apply.  It had taken a different view at the time of issuing the certificate however, based on its essential similarity to the circumstances of Longridge on the Thames, which was in the process of litigating its case that its activity amounted to a relevant charitable purpose activity at the time Marlow Rowing Club issued the certificate.  As we now know, Longridge was unsuccessful at Court of Appeal stage.  However, Longridge had won at First and Upper Tribunal prior to the reverse at the Court of Appeal.  Marlow issued its certificate after the result of the First Tribunal, and before the confirmatory result from the Upper Tribunal.

Prior to issuing the certificate the Club took advice from a leading QC and its accountants (a large firm).  We do not have access to these two pieces of advice, and can only interpret them vicariously through the tribunal decision.  However, it is not clear that the advice was emphatically in favour of simply issuing a certificate, though one could infer from limited information that it implied that to do so was reasonable.  It is clear that the Club knew that HMRC disagreed with the First Tribunal’s decision in Longridge, and appeared to know that HMRC wished to continue litigation.  On the other hand, as at the time of issuance of the certificate, a tribunal had decided that a use such as that intended by the Club would qualify as relevant charitable use.

It is therefore concerning to note that the tribunal has decided that the issuance of the certificate was careless because the possible doubts about relevant charitable use qualification were not brought to HMRC’s attention at the time.

It is worth noting that a certificate must be in place prior to works commencing, so the issuance cannot practically await a final court decision in a typical span of litigation.  It is also self evident that HMRC would have opined that the certificate could not be issued, and it is thus difficult to see what the trustees of the charity could then do, having gone to HMRC for agreement.  The only alternative (which the charity did not take) would be to issue the certificate and at the same time inform HMRC of its having done so, in order to allow HMRC to assess the due tax.  But would that have meant no penalty could apply?  The certificate would still have been issued.  The only difference would have been, arguably, that further care, following the certificate’s issue, would have been regarded as having been given.

It may not have helped that the advice seems not to have been followed in its most cautious guise, or that perhaps the wrong questions were asked by the charity in eliciting the advice.  There is an aspect whereby the certificate included parts of the building that could not be justified even on a Longridge basis, and that will not have helped.  But, otherwise, the stark upshot appears to be that, if you rely on current case law in deciding to issue the certificate while knowing that HMRC does not agree with the case decision, you are deemed careless.  This seems to be extremely harsh as any kind of general principle.  Trustees in a similar position will wish to take urgent advice.

Graham Elliott is Technical Adviser to the Charity Tax Group and Director of City & Cambridge Consultancy