Non-definitive HMRC guidance and reasonable excuse

The Upper Tribunal in Westow Cricket Club v HMRC [2021] UKUT 23 has held that a letter from HMRC giving an incorrect (but non-definitive) view on the VAT treatment undertaken by the taxpayer did provide a reasonable excuse for incorrectly issuing a certificate of zero-rating.

The Upper Tribunal considered that, in the context of this case, it was reasonable for the taxpayer to rely on that guidance, despite the evident caveats in the letter. Indeed, HMRC's failure to highlight the further requirements for issuing a zero-rating certificate in its letter had contributed to the taxpayer's reasonable excuse.

The Upper Tribunal has also suggested that HMRC were not to be criticised for seeking to be helpful in this case and should be encouraged to continue to provide helpful responses to requests. Whether the result of this case is to make HMRC more circumspect about providing non-definitive guidance remains to be seen, however.

Background

The case concerned a local community sports club (WCC) run by volunteers which raised funds to build a sports pavilion. It sought guidance from HMRC on whether the supplies of building work to it could be zero-rated. HMRC replied saying that its policy prevented the issue of a 'definitive response' where the point is covered by a public notice as here.

However, the officer went on to refer to para 14.7.4 of Notice 708 and say that provided the 'pavilion meets the conditions set out, and it appears to do so, the construction work will be zero-rated'. That was incorrect as the club was not a charity and, as such, the pavilion was not to be used for a 'relevant charitable purpose' as required by the zero-rating provisions. The club did, however, register as a Community Amateur Sports Club (CASC), which is relevant for the purposes of other tax rules and in certain circumstances a CASC is given the same tax treatment as a charity.

WCC relied on the response from HMRC to provide a certificate of zero-rating for the building works it received. Following a check, HMRC concluded that the certificate had been issued incorrectly and imposed a VAT penalty on the club. In turn, the club relied on the letter from HMRC to argue that it had a reasonable excuse for the mistake.

The FTT held that since it was clear that the response from HMRC was not "definitive" it was not reasonable for the club to rely on it. In any event, even if the FTT was wrong on the first point, it considered that once the completion of the certificate itself was taken into account - which specifically required the club to state that the building was to be used 'solely for a relevant charitable purpose, namely by a charity' - this removed any objectively reasonable excuse that might otherwise have existed.  

Decision of the Upper Tribunal

The Upper Tribunal has now overturned the earlier decision of the FTT and found that the taxpayer did have a reasonable excuse in the circumstances.

In particular, the Upper Tribunal considered that the FTT had focussed too narrowly on the question whether the advice provided to the club had been "definitive" or not. That had not been the correct question to ask. The Upper Tribunal considered that there was only one question for the FTT to answer, namely whether the taxpayer had a reasonable excuse for completing the certificate in the manner it did in the light not only of the terms of HMRC's letter but also all the other relevant circumstances prevailing at the time that the certificate was completed. This was not a case in which the FTT should have considered whether there may have been a reasonable excuse at an earlier point (the letter from HMRC) which subsequently ceased to exist (when the certificate was signed) and accordingly the FTT had erred in law in considering the issue in that way.

The Upper Tribunal also criticised the FTT for failing to consider why the taxpayer completed the certificate by stating that it was a charity and putting in a CASC number, particularly in the light of its finding that the witnesses from the taxpayer were honest. The FTT considered that the taxpayer should have sought further guidance when it was clear that the statement on the certificate was at odds with the letter. However, the Upper Tribunal noted that there was ongoing litigation on the question whether a CASC could qualify as a charity for the purposes of these provisions. In Eynsham Cricket Club v HMRC [2019] UKUT 286, the FTT decided that the taxpayer, a cricket club which was registered as CASC but which was not registered as a charity and was not a charity under the general law, was nevertheless a charity for the purposes of Group 5 of Schedule 8 because it was established for charitable purposes only. The Upper Tribunal reversed that decision, holding that a CASC could not be a charity for the purposes of Group 5 of Schedule 8, but the Court of Appeal has recently heard an appeal against that decision and its judgment is awaited.

The Upper Tribunal also rejected HMRC's case that the FTT could not be criticised for limiting its consideration to the question whether the advice from HMRC in the original letter had been definitive as that had been the way the case had been put by the taxpayer. In a case concerning a small, unrepresented taxpayer, it was the duty of the FTT to apply "a considerable degree of flexibility and informality... The FTT should not approach the issues to be determined by applying an overly legalistic and narrow approach based on a strict interpretation of a taxpayer's pleadings. In this kind of case, the correct approach is, as we have said, to look at all the relevant circumstances and put the central question as to whether it was reasonable for WCC to have relied on what was said in HMRC's letter in the context of the circumstances prevailing at the time the certificate was completed. Those circumstances would include the fact that WCC had, subsequent to HMRC's letter, registered as a CASC and put its CASC number on the certificate where it was asked to provide a charity registration number".

Since the Upper Tribunal considered that the FTT had erred in law in the sense of errors of approach as to the application of the question as to what in this case constituted a reasonable excuse, it used its powers to remake the decision.

The Upper Tribunal considered that it was reasonable for a taxpayer in WCC's position, bearing in mind that it was run by a group of volunteers with little expertise on matters of indirect taxation, to rely on what was said in HMRC's letter as constituting a reasonable excuse for having completed the zero-rated certificate.  HMRC's answer to the queries raised by WCC focused on the requirements to constitute a village hall or similar building, and HMRC's statement that the pavilion appeared to meet the requirements in that regard was sufficiently clear and without qualification other than to advise the taxpayer to read the notice itself.  It was reasonable for a taxpayer in WCC's position to take the view that its pavilion would satisfy those requirements.

The letter said nothing about the need for the taxpayer to be a charity and, on this point, the key question was therefore whether completing the declaration to the effect that the building must be used for charitable purpose by a charity was a reasonable course of action for the taxpayer to take in the circumstances without seeking further advice on the "charity" question. The Upper Tribunal concluded that this was a reasonable course of action. The taxpayer had been quite open in its letter in disclosing its status as a "non-profit making" organisation. HMRC decided to answer the queries that were raised, notwithstanding the fact that its policy was not to do so situation such as this. Therefore, having had such clear advice on the "village hall or similar" issue and without any indication from HMRC that there were any other conditions that the taxpayer should consider, it was reasonable for it to proceed on the basis that the works concerned qualified for zero-rating. Moreover, the Upper Tribunal noted that had it taken advice on the point, then given the uncertainties arising from the Eynsham case as to whether a CASC is a charity for VAT purposes, it may well have been the case that it would have been advised that CASC status was sufficient.

Comment

The Upper Tribunal appears to have taken a particularly broad approach to the question of "reasonable excuse" in this context, holding HMRC to helpful advice provided by HMRC to a small, volunteer run club, despite the explicit statements in the response from HMRC that it was not definitive advice. No doubt, a higher level of scrutiny would be required of larger businesses in these circumstances, but even so the decision makes it clear that HMRC cannot simply rely on labelling advice as "not definitive" in reasonable excuse cases. It calls into question HMRC's current practice of providing what could be referred to as "non-clearance" responses where taxpayers querying points of uncertainty receive a non-definitive response which in some cases refers taxpayers to generic HMRC guidance and in other cases analyses the issue whilst not providing a clear view.

Indeed, the FTT had criticised HMRC for the somewhat confusing nature of a non-definitive response which nevertheless offered an (incorrect) opinion on the individual taxpayer's situation. Interestingly, the Upper Tribunal took a different tack on this issue noting that "HMRC should [not] be criticised for deciding to answer WCC's queries and they are to be encouraged to answer similar requests in the future. It is unfortunate from their perspective that in this case the letter they wrote was not as comprehensive in its answers as it might have been". Certainly, it would have been less misleading had HMRC simply referred to the relevant notice and left matters at that - and the Upper Tribunal may have been influenced by the consideration that this case may counter-intuitively suggest that HMRC should provide less guidance rather than more.

As a general comment, the current system of clearance requests does not appear fit for purpose. Clearance requests can only be submitted where there is a clear point of uncertainty in the guidance to be resolved. Where points of uncertainty are identified however, HMRC do not necessarily address those specific points or provide definitive advice.

We would recommend that two simple steps could be taken to dramatically reduce the volume of clearance requests and uncertainty for taxpayers.

• Firstly, anonymised and redacted responses to ruling requests could be published. This would have the effect of greater transparency for taxpayers and reduce concerns that individual taxpayers have beneficial rulings. Confidential taxpayer information can be removed where needed. This was recommended by the Office of Tax Simplification as its second core recommendation for the reform of VAT in November 2017 and indeed is something that some other jurisdictions already do.
• Secondly, where the issue of the ruling request is likely to have a significant impact on an industry or is the subject of multiple ruling requests from individual taxpayers (such as the recent developments in the VAT treatment of fees for the management of model portfolios), then HMRC should issue a clear position paper in a timely fashion rather than require each taxpayer to submit separate clearance requests. This is the ninth core recommendation from the Office of Tax Simplification report.  

Of course, the question whether guidance from HMRC (whether in the form of a specific ruling or general guidance) as to the correct tax treatment of a transaction can be relied on by a taxpayer (based on legitimate expectation principles) is different to the question in this case as to whether the guidance might give rise to a reasonable excuse for an error. In either case, it is important from a practical perspective that taxpayers should ensure they include all relevant information in clearance requests to HMRC in order that they have full knowledge of the facts. Specific areas of uncertainty should be set out explicitly in clearance requests.

Where a taxpayer seeks to rely upon an HMRC clearance request which is not definitive, it is still important to request professional advice where the taxpayer is uncertain on their position. An HMRC response to a clearance request may not be sufficient to avoid HMRC levying a penalty on the basis of having a reasonable excuse. This case does demonstrate however, that taxpayers should certainly consider their position where they have been issued a penalty on the basis of HMRC guidance which was ultimately incorrect and the merits of appealing that penalty.