Implications of incorrect decisions on whether zero rating applies to construction

Wed 05 Dec 2018

Two recent cases highlight the implications of getting the decision wrong on whether a construction supply is zero rated. In the case of J&B Hopkins, the business was assessed to VAT despite the fact that, had the invoicing been correctly treated for VAT in the first place, there would have been no loss to the business.  In the case of Marlow Rowing Club, reliance on a court decision that set no precedent for tax meant they could not be relieved of the requirement to pay VAT.

Getting a decision on zero rating of construction activities wrong, can have significant cashflow implications. To discuss the implications of zero rating further, please get in touch with a member of the Mazars indirect tax team.

Case summaries

J&B Hopkins Ltd (JBHL) failed in their appeal to the Upper Tribunal (UT) against the First tier Tribunal’s (FTT’s) dismissal of their argument for not having to pay VAT on their incorrectly zero-rated sales invoice to a business now in liquidation. Had it been invoiced, the VAT would have been recoverable by JBHL’s customer, but this fact did not persuade either the FTT or UT, that BJHL should be let off the requirement to pay VAT.

JBHL supplied mechanical and electrical supplies to Rok Building Ltd for the construction of a place of worship for a charity. Rok properly treated its supply to the charity as zero rated and would have been able to recover any input VAT charged to it had it been charged.  However, JBHL and Rok incorrectly treated JBHL’s supplies as zero rated.  By the time the mistake was discovered, Rok had gone into liquidation and JBHL took the view that it should not issue a VAT invoice as it would not be able to recover the VAT, which amounted to £221k.

The UT agreed with the FTT that HMRC would not be unjustly enriched with respect to JBHL if it (HMRC) collected VAT from JBHL.   This was supported by several CJEU cases.  It was Rok who could have reclaimed any VAT charged by JBHL so Rok was the party who might have been able to bring an unjust enrichment case.  In addition if JBHL had issued a VAT only invoice and not been paid by Rok, they could have applied VAT bad debt relief provisions and obtained relief for the bad debt.

Marlow Rowing Club (MRC) issued a certificate for zero rating in November 2013 in respect of a ‘sports hub’ building on the basis it would be used for a relevant charitable purpose rather than in the course of furtherance of a business.  It was to be used by the club itself and other sports clubs in the local area, with a gym facility offered to both club members and to non-club members.

The zero rating certificate was issued on the basis that the February 2013 FTT decision in Longridge was valid. The FTT in that case had decided that the construction of a training building for Longridge was zero rated. Longridge is a charity providing water recreation for young adults, charging a small fee from which it did not make a profit.  The UT subsequently agreed with the FTT’s Longridge decision in November 2014.  In September 2016 the Court of Appeal determined Longridge was in business (despite not making a profit), with the consequence that the training building was not constructed for a relevant charitable purpose and the construction works could not be zero rated.

MRC knew that the FTT decision in Longridge was not final, and that the issue of the zero rating certificate was not in accordance with HMRC policy. In considering the application of zero rating to its construction works, MRC had taken Counsel’s advice and a second opinion from an accountant, but had not properly followed that advice.

HMRC considered MRC should not have issued the zero rating certificate and assessed it to a penalty equivalent to the VAT that should have been charged. This could only be vacated if MRC had a reasonable excuse for issuing the certificate, which both the FTT and UT agreed was not present.