A decision of the Upper Tribunal  (Westow Cricket Club v HMRC) appears, at first sight, to having nothing to do with charities, but it has a passing interest, since it refers to a CASC and a case (not the first) in which a CASC mistook itself for a charity.

Westow Cricket Club (a CASC) issued a certificate under which it claimed the zero rate relief for a new building, on the basis of intended use of it, by a charity, for relevant charitable purposes.  It was not a charity.  Did it have a reasonable excuse for not noticing that inconsistency?  If not, then the 100% penalty payable to HMRC had the effect of reimbursing the VAT relief, which, if we assume that the contractor is not pursued by HMRC for the undercharge, is all that HMRC gets back.  It does not achieve a punitive recovery, despite the liability being deemed to be a penalty.

The appellant had written to HMRC asking whether it qualified.  In that letter it said it was a non-profit body, and made no mention of not being a charity.  HMRC prefaced its response with the usual disclaimer to the effect that it was not prepared to issue a formal decision, and then went on to confirm that it appeared nonetheless that the development qualified for the claimed relief.  Fortified by this, the CASC issued the certificate to the contractor.

The First tier Tribunal had decided that, whatever one might say about that HMRC letter in response to the appellant’s letter, it must have been obvious from the certificate words that the appellant was not a charity, but was claiming to be one, and thus could not have a ‘reasonable excuse’ for that oversight.

On appeal, the Upper Tribunal has overturned that decision, and has allowed the appellant’s appeal.

The reasons are varied, but can be summarised as follows.  First, whilst HMRC sought by the usual disclaimer in the letter to allow itself room to waive any liability for its approval of the relief, that might not be regarded as sufficient to displace ‘reasonable excuse’ for an error (as distinct from liability to a sum of actual tax).  It was reasonable to rely on the advice irrespective of the formulaic disclaimer.  In that respect, the fact that the legislation requires a penalty to be levied to have the same effect as reimbursing VAT, is a frailty from HMRC’s point of view, as has been seen in recent cases.

Second, whilst it may seem terribly obvious to some people that a CASC is not a charity, this was a volunteer run club, and CASCs are often viewed as charitable, in a sense, which seems a reasonable misconception.  Having received the HMRC response, which had not made clear that the status of a charity was critical, and having never claimed in their letter to HMRC that they were a charity (but only a non-profit body) the judges thought that the CASC volunteer staff had not been unreasonable to assume that the term ‘charity’ had a relatively relaxed definition.

So ‘reasonable excuse’ was granted by the tribunal.

Plainly, this outcome is not so very welcome to charities, which need to undergo the regulatory impositions which are a quid pro quo for a range of tax benefits.  However, perhaps the most striking thing here is that HMRC appears not to have accepted that the response to the letter ought, at minimum, to have mentioned the need to be a formal charity.  In addition, it seems strange, perhaps, that HMRC did not revert to the contractor to pay the tax, since only minimal due diligence by the contractor would have uncovered that the customer was not a charity and therefore could not qualify for the relief.  Whilst HMRC rightly seeks not to cause a cost to a supplier who has accepted a certificate to the effect that the use will be a qualifying one, that is not to the same as not requiring the supplier to take reasonable care that the customer is a charity in the first place, and therefore has the status to be capable of receiving services at a charity rate of charge.  Indeed, the HMRC’s Notice says: “Suppliers must take reasonable steps to check that their customer holds appropriate charitable status.”

So, it seems to me that the CASC may have had a reasonable excuse in all the circumstances to issue the erroneous certificate, but the supplier was not entitled to accept it, and HMRC does not really have much of an excuse for failing to respond to the CASC with guidance on the status issue.

That said, it would not be surprising if HMRC appealed to the Court of Appeal on the question of whether the person completing a certificate which asserts possession of charitable status can ever have an excuse for wrongly doing so.  HMRC perhaps should drop the argument based on the routine disclaimer in their letter however, particularly given the frailty of their response, and case management, in more general terms.

Graham Elliott is Technical Adviser to the Charity Tax Group