Unfit for VAT: fitness centre subscription defaulter decision costs taxman £1 million
A First-Tier Tribunal appeal ruling in favour of a chain of fitness clubs means fitness club chain Esporta Ltd is in line for a £1 million tax windfall.
The decision opens the door for claims from some of the big operators in the industry such as David Lloyd and Fitness First. The verdict could also be a precedent for other businesses that offer memberships, subscriptions and services through monthly payments.
Like many other fitness clubs Esporta offers new members the opportunity to join for a minimum of twelve months through a monthly subscription. Inevitably some members fail to make all the payments and are barred from using their facilities. Collection agencies then pursue payments on Esporta’s behalf.
HMRC rejected a VAT repayment claim by Esporta that it should treat payments clawed back through a collection agency as non-taxable compensation for breach of contract but the tribunal which sat at the end of September allowed Esporta’s appeal.
Ruth Corkin, VAT Manager at accountants and business advisers James Cowper explained:
“The verdict means that sums recovered as compensation after an individual is suspended because they default on a commercial fitness club membership subscription are free of VAT.
“HM Revenue and Customs has until 23 November to appeal the decision. I would be surprised if they let it rest but if the judgment stands the big chains will no doubt also submit overpayment claims. The verdict could also be a precedent for other subscription based service providers such as telephone and broadband companies.”
Ruth concludes: “We recommend that any club that thinks it might be affected takes advice from their accountant on whether they can make a retrospective claim for overpayments.”
Ruth Corkin, VAT Manager, James Cowper LLP, Tel +44 (0)1865 200500 or email rcorkin@jamescowper.co.uk
01.11.11