Health and fitness club operator Esporta has lost its claim at the Court of Appeal for repayment of £1.3m VAT on debts recovered from members who had stopped paying the monthly fee, which it argued should be viewed as damages or compensation for breach of contract rather than consideration for the supply of services for VAT purposes
Club members join for a minimum of 12 months and pay fees in advance either for the whole period or by monthly direct debit. If members default during that period, Esporta turns off their swipe card so they cannot access the club’s facilities, but does not terminate membership. The company then seeks to recover the outstanding fees.
Esporta’s original claim that it should be able to recover the VAT declared on debts recovered from members in this way, on the basis that they were no longer receiving services, was upheld at a First Tier Tribunal (FTT) but this decision was subsequently reversed at an Upper Tribunal (UT) [[2013] BVC 1,663; [2013] UKUT 173 (TCC)].
The company then took the case to the Court of Appeal, arguing that the UT had failed to take into account the ‘economic reality’ that each monthly payment was consideration for using the gym facilities for that specific month, meaning that there was no direct and immediate link between an overdue payment for that month and access to the club's facilities. It also claimed that the UT had failed to consider the situation where a member defaulted after the initial commitment period for which they had signed up.
At the Court of Appeal, HMRC argued that the service supplied by Esporta was not merely the grant of access to its facilities, but also making available and maintaining facilities for the collective body of members, including those in default. Where access was withheld, the overdue payments were still to be regarded as being in return for access to the facilities, which members could still obtain as of right provided they paid the arrears.
The Court of Appeal agreed with HMRC’s argument and dismissed Esporta’s appeal [[ 2014] EWCA Civ 155; Case No: A3/2013/1619]. It stated that the club’s contract provides for the member to be allowed access to the facilities in return for the monthly payments, conditional on the payments being made. The exclusion of members for non-payment did not mean that they were being provided with no services. They are being provided with the same services as before, namely the right to access to the facilities provided they pay the monthly fees. On that basis, the club is still supplying services which are subject to VAT.
Stanley Dencher, CCH tax writer said: ‘The Court of Appeal reached the expected conclusion. Esporta was ambitious in trying to escape having to account for VAT on the receipts. The judgment is bad news for membership bodies receiving payment of arrears from defaulting members in similar circumstances.’
The judgment is available here: http://www.bailii.org/ew/cases/EWCA/Civ/2014/155.html
