In this month’s Chartered Accountants Tax Case Digest we look at two similar cases which appeared recently before the First-tier Tribunal (“FTT”). Each case dealt with the VAT treatment of services provided in relation to a new clubhouse. But the decisions were very different with one classed as zero-rated and the other standard-rated. So why the difference?

In the Witney Bowls Club case, the stumbling block was that the club was registered as a community amateur sports club (“CASC”). But it wasn’t a registered charity. Nor was it established for charitable purposes. Another problem was the high number of social members who enjoyed the club’s facilities. However, Caithness Rugby Football Club was a registered charity.

The Tribunals also considered whether the new clubhouses were similar to village halls by providing community facilities, as this would allow zero-rating. Very different opinions were given on what may have looked like exactly the same situation for each club. Each of the cases is examined in more detail below.

So what does this mean in practical terms?

Whilst it is accepted that a club can be established for the purpose of the advancement of amateur sport, it will not be established for charitable purposes alone if it has a high proportion of social members. The social functions of a club are not part of a charitable purpose.

However, this does not mean that a charitable CASC cannot include social facilities, such as a bar, on its premises. The Tribunal found that it simply means activities of this nature must be operated by a separate non-charitable organisation, such as a social club, to be run on an arm’s length basis from the charity.

Many sports clubs across the country have spare capacity and allow third parties to use their buildings when they don’t need them. But these aren’t village halls and thus would not be entitled to zero-rating. For borderline cases it is certainly best practice to apply to HMRC’s Charity Unit in Bootle for pre-clearance. This is a really important step because remember a charity must issue a certificate to builders confirming a project is eligible for zero-rating before work commences.

Witney Town Bowls Club v The Commissioners for Her Majesty’s Revenue and Customs [2015] UKUT 421 (TC)

Background

Witney Town Bowls Club (the “Club”) appealed HMRC’s decision that the supply to the Club of services relating to the construction of a new clubhouse were not zero-rated for VAT purposes. In particular HMRC asserted that the supply of those services did not fall within item 2 of Group 5 Schedule 8 to the Value Added Tax Act 1994 (“VATA 1994”).

The Club has been in existence for over 100 years and is registered as a CASC under section 658 of the Corporation Tax Act 2010. However the Club is not registered as a charity under the Charities Act 2011.

When it registered as a CASC it considered then whether to apply for charitable status. The Club took the view that the benefits of CASC status were the main benefits it was seeking. In the Club’s view, the additional benefits of being a charity did not justify the additional administrative burden that charitable status would entail.

Membership of the Club is open to anyone irrespective of ability and is divided between playing members (80%) and social members (20%). These proportions have changed significantly in recent years. In particular, the proportion of social members significantly increased following the construction of the clubhouse. Social members are entitled to use all of the facilities of the Club except they do not play.

Playing members pay an annual subscription with reduced fees available for the indoor season and junior members. This subscription entitles members to use the facilities throughout the year. Members can invite visitors to play, for which there is a nominal charge. As the bowls club is located in a public park, members of the public can use the outdoor greens at a price for a one hour session.

The Club is a not for profit organization run entirely by volunteers and has an annual income of over £25,000. However its fees are set at a rate to ensure a small annual surplus with any surplus generated retained for the Club’s benefit. No distributions are made to members nor is any payment made to any officer of the Club or any of the staff.

The Club is supported significantly by its local Town Council which owns the property on which the clubhouse is built. The Town Council also maintains the outdoor bowling greens and charges the Club a fee for this, though that fee is much less than its commercial cost.

In the mid 2000’s, the Club began to consider the possibility of replacing its existing clubhouse as it had expanded its membership and was in need of larger and improved facilities, in particular, for indoor bowls. However grants were generally not available for repairing the existing structure and thus the Club began to explore the possibility of constructing a new clubhouse.

The project was run by the Club’s Management Committee which arranged the finance and instructed architects and planning consultants. However, it engaged with other local groups as part of that process. The Town Council was also was very much involved in the project as were other local community groups.

The design of the building reflected the fact that its main purpose was to act as a clubhouse for the Club. Floor area needed to be sufficiently large to accommodate indoor bowling. The new pavilion also included male and female changing facilities, toilets, a kitchen, a bar and storage space. However, the design also sought to permit flexible use of the building.

Various applications for grant funding referred to the possible use of the building by other community groups. As a result, the Club sought and got permission for changes to its lease so that the clubhouse could be hired out to other groups.

The planning process and grant applications took several years. In April 2014, the Club issued a certificate for zero-rated building work in the form prescribed by HMRC (for the purposes of Note 12 of Group 5 Schedule 8 to VATA 1994). In that certificate, it was certified on behalf of the Club that the building was to be used for a relevant charitable purpose namely by a charity “as a village hall or similarly in providing social or recreational facilities for a local community”.

Building work was completed in August 2014 and the total cost of the project was £273,039. Since then, the clubhouse is available all year round. The Club’s Management Committee handles any bookings of the facilities. The clubhouse is primarily used for the Club’s sporting and social activities. However, the facilities are also used by other groups. There are two regular bookings for several hours each week. Other bookings have been made on an ad hoc basis. The Club charges a fee to those who hire the clubhouse. There are separate charges for the use of the bar and the kitchen facilities.

Decision

Applicable law

Section 30 VATA 1994 provides (in part) as follows:

Zero-rating

“(2) A supply of goods or services is zero-rated by virtue of this subsection if the goods or services are of a description for the time being specified in Schedule 8 or the supply is of a description for the time being so specified.”

Item 2 of Group 5 of Schedule 8 to VATA 1994 includes:

“The supply in the course of the construction of:

1. a building designed as a dwelling or number of dwellings or intended for use solely for a relevant residential purpose or a relevant charitable purpose; or
2. ….. of any services related to the construction other than the services of an architect, surveyor or any person acting as a consultant or in a supervisory capacity.”

There are a number of notes to Group 5. Note 6 provides:

“(6) Use for a relevant charitable purpose means use by a charity in either or both the following ways, namely –

1. otherwise than in the course or furtherance of a business;
2. as a village hall or similarly in providing social or recreational facilities for a local community.”

The parties agreed that the supplies made were supplies made in the course of construction of a building for the purpose of item 2 Group 5. The issues before the Tribunal were therefore:

1. whether the Club is a “charity” for the purpose of item 2 of Group 5 Schedule 8 to VATA 1994;
2. if the Club is a “charity”, whether the new clubhouse was intended for use by the Club either:
   1. “otherwise than in the course or furtherance of a business” within paragraph (a) of Note 6 to Group 5 of Schedule 8; or
   2. as “a village hall or similarly in providing social or recreational facilities” for a local community within paragraph (b) of Note 6 to Group 5.

Is the Club a Charity?

The definition of “charity” in Note 6 to Group 5 Schedule 8 to VATA 1994 has the meaning given in paragraph 1 Schedule 6 to the Finance Act 2010. In particular, the registration condition (paragraph 1(1)(c)) must be met. This condition is set out in paragraph 3 of Schedule 6. It is divided into two parts.

An institution which is a charity within section 10 of the Charities Act 2011, must meet “Condition A”. Condition A is that the institution has complied with any requirement to be registered in the register of charities kept under section 29 of the Charities Act 2011. Other institutions must meet “Condition B”.

The Club, whose constitution is governed by English law, would be subject to the jurisdiction of the High Court and would therefore have to satisfy Condition A if it were to meet the registration condition. Condition A is set out in paragraph 3(2) and requires the institution to have “complied with any requirement to be registered in the Register of Charities kept under section 29 of the Charities Act 2011”.

The requirement to register is set out in section 30 of the Charities Act 2011. It requires every charity to register unless it falls within the one of the exceptions set out in sub-section (2) of that section. Section 30 sets out a series of exceptions, none of which apply to the Club.

The Tribunal found that even if the Club could show it is established for charitable purposes, it must be treated as not being so and so the Club cannot meet the charitable purpose condition in paragraph 1(1)(a) of Schedule 6. As a result, the Club cannot be a charity for the purpose of Note 6 to Group 5 Schedule 8 VATA 1994.

The Tribunal’s view was also that the Club is not established for charitable purposes only and so does not meet the charitable purpose condition. In order to meet that condition, a charity has to have a purpose which falls within section 3 of the Charities Act 2011 and which is for the public benefit. The social functions of the Club are not part of a charitable purpose and thus the Club is not established for charitable purposes only given the proportion of social members that it has.

The Tribunal then set out its views on the other matters raised.

Is the Clubhouse intended for use “otherwise than in the course or furtherance of a business”?

The Club submitted that the clubhouse is intended to be used by the Club “otherwise than in the course or furtherance of a business”. In support of this it cited the fact that it is run by volunteers, that the rates that it charges by way of subscription and green fees to its members are a fraction of the commercial costs, that the Club could not operate without the support of the Town Council and that the profile of the Club’s collection of fees and subscriptions does not follow any logical commercial pattern.

HMRC referred to section 94 VATA 1994. Sub-section (2) of that section provides that the “provision by a club association or organisation (for a subscription or other consideration) of the facilities or advantages available to its members” are deemed to be the carrying on of a business for VAT purposes.

HMRC thus cited that the Club’s activities fall full-square within the provisions of section 94(2). Under section 94(2), the Club is treated as carrying on a business and the clubhouse is intended to be used in the course of that business. The decision in the case of Hunmanby Bowling Club (VAT Decision 12136) was cited.

The Tribunal agreed with HMRC. The Club provides facilities for its members who pay a subscription. The fact that those subscriptions are subsidised by the local Town Council and that the Club does not seek to make a profit is irrelevant. The clubhouse is used for the purpose of that deemed business and so the construction services cannot fall within paragraph (a) of Note 6 to Group 5 of Schedule 8 to VATA 1994.

Is the clubhouse intended for use as “a village hall or similarly in providing social or recreational facilities for a local community”?

The Tribunal was referred to various cases in which the courts and tribunals have sought to apply the test in Note 6(b) which is relevant here. Several other authorities were also reviewed. One particular case was the judgment of the Court of Appeal in the Jubilee Hall case to which both the Club and HMRC referred as part of their arguments.

The parties both referred to a particular passage from the judgment of Vinelott J in which he describes the purpose of Note 6(b) as being to extend the relief to cases where the local community is the final consumer.

Case law suggests that the phrase “social or recreational facilities”, even when qualified by the reference to use being similar to a village hall, does not stop the use of a building primarily for sporting activities. It is not necessary for the building to provide facilities for the same mix of activities as a traditional village hall.

The clubhouse in this case is clearly intended to be used for social/recreational facilities and it was designed to accommodate indoor bowls and is used primarily for that purpose. But it is capable of being adapted and is used to provide meeting space for other local community groups.

The issue is therefore whether the requirement that the facilities be provided for a local community in a manner similar to those of a village hall adds anything further to that requirement. Case law suggests that it does and, in particular, that the manner in which the building is managed and run should involve, and be for the benefit of, the local community. The question is whether the effect is to make the local community the “final consumer” in the sense used by Vinelott J in the Jubilee Hall case.

On balance, the Tribunal held that the Club does not meet that test. The project for the construction of the clubhouse was driven by the Club. The clubhouse is managed by the Club’s Management Committee on behalf of the Club and for the benefit of the Club. There is no involvement in its management from other representatives of the local community. The clubhouse is used by some other local groups, but it is primarily used for the purposes of the Club. The income from the hiring of the venue to other groups and users accrues for the benefit of the Club.

For this reason, although the clubhouse is intended for use in providing social or recreational facilities for a local community, it is not intended for such use as “a village hall or similarly” within paragraph (b) of Note 6 to Group 5 Schedule 8 to VATA 1994.

The appeal was therefore dismissed.

Caithness Rugby Football Club v The Commissioners for Her Majesty’s Revenue and Customs [2015] UKUT 378 (TC)

Background

Caithness Rugby Football Club (the “Club”) appealed against HMRC’s December 2013 decision that supplies made in the course of construction of a clubhouse did not attract zero-rating. The Club contended that the supplies fall to be zero-rated for the reason that the building was intended to be used “as a village hall or similarly in providing social or recreational facilities for a local community”. HMRC disputed this.

The Club, a registered charity, is a members’ club affiliated to the rules of the Scottish Rugby Union. It is not registered for VAT and is the tenant of a lease granted for a peppercorn rent over 3.8 hectares of land. The playing fields used by the Club are located on this site.

In 2012, the Club started a project to construct a new clubhouse. A written request was submitted to HMRC enquiring whether the construction project would qualify for VAT zero-rating. HMRC responded they did not see scope for zero-rating save those works needed to facilitate disabled people.

£300,000 was required to build the clubhouse, of which 50% came from Sports Scotland with contributions made by some other organisations. The remaining sum was raised by the Club through fundraising events.

The clubhouse comprises four changing rooms occupying about half of the building, a main hall area, and a kitchen area that doubles as a bar area when functions are held and which can be shuttered off. There is also an officials’ room, a store room and a boiler room. The main hall area, kitchen and toilets occupy about 40 per cent of the building.

One clause of the constitution of the Club stipulates that the Club provides a community benefit, and the clubhouse is seen as an opportunity to better fulfil that aim. The Club has 57 full (playing) members, 45 friend (non-playing) members, and 263 junior members.

There are no benefits of being a non-playing member, but non-playing members join in as a way of supporting the Club. The clubhouse is used extensively by the community and is used for unconnected social and fundraising events. If booked for a social event, it is staffed by volunteers from the club.

The Club is also rented out to groups at reasonable rates to encourage its use by the wider community. There are no favourable rates for club members wishing to book the clubhouse.

It was never intended that the clubhouse would be used solely by the Club, and it was always intended that it would be available to others. Much of the use of the clubhouse could not have been anticipated at the time that it was constructed.

It was accepted that there was no reference to non-sporting activities in the funding application forms, and that the extent of use by non-sporting clubs was not foreseen, although it was always intended that the clubhouse would be available for use by other clubs.

Decision

The applicable law was identical to that in the Witney case.

The Club submitted that a village hall will have a number of definite users and an unlimited number of others who may want to use it, which is the case here. It is registered on the Scottish Charity Register. The legislation requires only that the clubhouse be used “similarly” to a village hall. The word “similarly” implies that some features will be different to a village hall. The legislation requires that it be used “for a local community”.

Some 85% of users of the clubhouse are from Thurso or the immediately surrounding area, and these represent a reasonable cross-section of the community. The legislation requires that the building be used “in providing social or recreational facilities”, but does not limit who may provide those facilities. The fact that the facilities are provided by a rugby club is therefore immaterial.

HMRC submitted that the burden of proof is on the Club to establish on a balance of probabilities the intended use of the building. It is the intention at the time of construction that is material. The best evidence of this will be expressions of intention made at the time of construction or before, since later statements may be after the fact rationalisations.

The funding application forms did not indicate an intention that the building would be for broader community use when they could have done so. Only some 5% of use by others was envisaged. The evidence indicates that use by other groups was something that just took off in an unanticipated way after the building was completed.

To meet the additional requirement of “village hall or similarly”, the building must in some sense be at the disposal of the community, that is, subject to the direction of the local community as to how it is used.

In determining whether this requirement is met, relevant factors include the nature of the building, the nature and extent of any commercial activity, whether control is exercised by a person other than the local community, and whether use of the building is at the direction of the local community. These questions should be considered decisive or at the very least highly relevant.

The Tribunal found that the correct approach is to construe the legislation, not HMRC’s guidance. The statutory words have to be construed in the detailed context of specific cases. The building must be subject to the direction of the local community in relation to how it is used.

In this case, equitable access and participation are missing. The Club holds the lease and can grant and deny access as it chooses. No other user would be given priority over the Club’s own required use. The changing rooms are not “social or recreational facilities” and the majority of other users do not use them.

Some users appear to be commercial organisations. Thus, other users are financially supporting the rugby club, rather than the rugby club supporting the community. The clubhouse was not conceived as something similar to a village hall, run by the local community for the local community.

Several cases were then referred to in some detail.

The Tribunal also noted that one of the requirements of Paragraph 6 is that there must be use by “a charity” of the building in question. However it was clear that the Club is a charity.

As the Club does not rely on sub-paragraph (a) of Paragraph 6, the only issue is whether Paragraph 6(b) is satisfied. Paragraph 6(b), read together with Item 2 in Group 5 Schedule 8 VATA, requires that the building be “intended for use solely … as a village hall or similarly in providing social or recreational facilities for a local community”. The words “intended for use” refer to the intention at the time of construction of the building.

Much of the evidence in the case concerns the use to which the building has been put since it was constructed. However, the subsequent use of a building may be a relevant factor. In particular, where a building has been used in a certain way from the time it was built, this is a strong inference that this was the intended use at the time of construction.

The Tribunal found that it was always intended that the clubhouse would be available for use by other clubs. The funding applications do not demonstrate an intention at the time of construction to limit the use of the clubhouse by other groups, or to reserve the principal usage of the clubhouse to the Club’s own activities.

That general intention is in fact consistent with the Club’s constitution. Evidence also shows that as early as January 2014, the clubhouse was being advertised as a “community venture” available for use by “any groups or individuals”.

The question is whether this intended use meets all of the requirements of Paragraph 6(b). This is ultimately a question of fact and the burden of proof is on the Club to establish, on a balance of probability, that each of the separate requirements of Paragraph 6(b) is satisfied.

One requirement of Paragraph 6(b) is that the building must be used in providing “social or recreational facilities”. A second requirement of Paragraph 6(b) is that the facilities must be provided to a “local community”.

Evidence was that although the membership of the Club itself is spread, when other users of the clubhouse are taken into account, approximately 85% of the usage of the clubhouse is by residents of Thurso or the immediate surrounding area.

Taking the geography of Caithness and the circumstances as a whole, the Tribunal was satisfied that the facilities in this case are provided to a “local community”.

The remaining requirement of Paragraph 6(b) is that the facilities must be used as a “village hall or similarly”. In determining whether this is met, the Tribunal took into account the following considerations, amongst others:-

• The clubhouse is used by a significant number of diverse community groups. The clubhouse is advertised as a “community venture” available for use by “any groups or individuals”.
• The clubhouse was constructed by and is managed by a members’ club on a non-commercial basis. The clubhouse is let out to other groups for modest rates, on the basis that users are responsible for their own cleaning.
• At the time of construction, the town hall in Thurso had recently ceased to be available for use as such; the clubhouse has played a role in filling that gap.
• The clubhouse is located on council-owned land. Thus, even before the clubhouse was constructed, the Club played a role in maintaining the publicly owned land on which the clubhouse is located for community use.
• A sporting pavilion or clubhouse is capable of being used as a “village hall or similarly”.
• The Tribunal does not consider it decisive that the clubhouse is managed by one of the groups that use it, or that only members of the Club can be elected to its executive committee, which is ultimately responsible for management of the clubhouse.
• Given that 90% of the usage of the hall is by clubs or groups other than the Club, the direct users of the clubhouse are people (individuals and groups) from the local community.

The Tribunal found that all of the requirements of Paragraph 6(b) are satisfied. For the reasons above, the appeal was allowed.

The full judgement in each case is available from: http://www.tribunals.gov.uk/financeandtax/Documents/decisions/