Out of control: HMRC loses VAT case on charitable use

On 27 July 2016, the Upper Tribunal ruled against HMRC and permitted zero-rating for the construction of a rugby clubhouse for Caithness Rugby Club, based on the Club’s intended “relevant charitable purpose” (RCP) for the use of the building.

Construction services supplied in constructing a building intended for RCP use can sometimes be zero-rated for VAT purposes. RCP use includes use of the building by a charity “as a village hall or similarly in providing social or recreational facilities for a local community.” Typically, HMRC tends to view RCP treatment under this limb very narrowly, and seeks to curtail the application of zero-rating as much as possible.

In particular, HMRC’s guidance for permitting zero-rating stipulates:

• That the building should be controlled by the local community, and not any particular club or group.
• Use of the building must be “arranged on a first come first served basis and no single group should have priority over the others”.

Many of the cases in this area, like this Caithness case, tend to relate to facilities constructed by sports clubs – intended to be used by the local community, but where HMRC argues that the community’s needs are subordinated to the priorities of the particular club (which often controls the building and its use).

HMRC sought to deny zero-rating in the present case for the £300,000 construction primarily on the basis that the Club controlled the building – and that a prerequisite of the VAT relief was that the local community should instead direct or control the use of the facilities.

However, the Upper Tribunal disagreed with HMRC. While accepting that community control was a factor in the analysis, it was not by itself determinative. In this case, the building was actually used very extensively (as to approximately 90 per cent) by the community, and it was always intended that the facilities would be widely used by other local groups, since the building was on land leased from the local council and another local town hall had closed down. The fact that the Club controlled and managed the building, and prioritised its own use (with a priority booking system for rugby matches), did not prevent zero-rating for the construction costs, given the very material intended and actual use by others.

This case is closely linked to another decision in 2015 (New Deer Community Association v HMRC), which represented something of a pyrrhic victory for HMRC. Although HMRC successfully prevented zero-rating in that case (on the different point that the building constructed in that case was not really a social facility used by the local community – instead the adjacent sporting pitch was), the Upper Tribunal rejected HMRC’s argument that control by the local community was essential, and preferred an analysis based on the use by the local community. So despite winning that 2015 case, there may not be too much happiness at HMRC about the reasons for that outcome – especially as that New Deer decision has now formed part of the Upper Tribunal’s reasoning in this Caithness case!