Fitness club loses VAT appeal

Gym membership fees which are paid late after a member has been barred from the gym are part of a service and subject to VAT, the Court of Appeal has ruled.

The case involved company Esporta, which runs health and fitness clubs in the UK.

Members join for minimum of one year and pay fees in advance, either in one go or by monthly direct debits.

The case heard in the Court of Appeal was about members who pay monthly in advance, and who default on their payments. When this happens, Esporta turns off the member's swipe card within five days, denying the member access to its clubs.

Esporta doesn't terminate the membership. It later tries to recover the outstanding membership fees for the remainder of the "commitment period" or until the end of a three-month notice period after the "commitment period" has ended.

In one instance, when Esporta barred a defaulting member it argued that any payment received from him after that time was compensation for breach of contract and not "consideration for services" therefore not subject to VAT. 

HMRC argued that even after being barred from entering a club a member continued to enjoy benefits - for example, their club membership would be maintained without the need to re-apply.

In 2011, the first-tier tribunal ruled that the late payments were not consideration for a supply of services. In 2013, the upper tribunal said they were.

Earlier this year, the Court of Appeal for England and Wales rejected...

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Comments
leshoward's picture

Contracts

leshoward | | Permalink

The case makes a very fine point over cancellation charges, and whether they are consideration for a supply of services, or compensatory damages. The wording of the contract proved decisive at CA.

The lesson is clear: contracts must be carefully worded, taking into account VAT implications, as well as other matters.

The VAT Doctor's picture

Agreed

The VAT Doctor | | Permalink

I presume if Esporta had cancelled the defaulters membership, then the result may have been different.  I don't often agree with HMRC but., on this occasion, the correct result has occured taking into account the facts.