Tax

Esporta Ltd v Revenue and Customs Commissioners: Court of Appeal, Civil Division: 25 February 2014

Value added tax – Supply of goods or services – Supply of services for consideration – Claimant operating health clubs requiring members to pay fees in advance of commitment period – Claimant denying members access to club for default

The taxpayer operated a number of health and fitness clubs. The essential elements were that a member was required to sign up for a minimum commitment period of 12 months or longer (the commitment period) and paid the fees in advance, either for the whole commitment period or by monthly direct debit instalments.

When members who paid monthly in advance defaulted on their payments, the taxpayer turned off the member’s swipe card within five days, denying the member access to its clubs. The First-tier Tribunal (Tax) held that such late paid fees were not consideration for a supply of services for VAT purposes, but the Upper Tribunal (Tax and Chancery Chamber) (the UT) held that they were (see [2013] All ER (D) 39 (Nov)). The taxpayer appealed.

It fell to be determined: (i) whether the UT had failed to deal with the situation where the member defaulted after the end of the commitment period; (ii) whether the taxpayer had supplied any services to its members in return for overdue monthly payments which had fallen due during or after the end of the commitment period; and (iii) if so, what were those services.

The appeal would be dismissed.

(1) It was not right to say that the UT had ignored the situation where the member defaulted after the end of the commitment period. However, the UT’s decision had not explained what the late payment of a monthly instalment made after the initial commitment period was made in return for. Such a late paid monthly fee could not properly be regarded as being paid in return for access to facilities during the commitment period. That posed a serious problem for the UT’s analysis (see [23], [24], [42], [43] of the judgment).

(2) It was settled law that, in determining the nature of a supply: (i) regard had to be had to the economic realities and to all the circumstances in which the transaction had taken place; (ii) there had to be a direct and immediate link between the consideration and the services provided; and (iii) the remuneration received by the service provider had to constitute the value actually given in return for the service supplied to the recipient. The contractual terms were the starting point and the court had to consider whether those terms reflected the economic and commercial reality of the transaction (see [14]-[16], [41]-[43] of the judgment).

In the instant case, the contract provided for the member to be allowed access to the facilities in return for the monthly payments during the commitment period and thereafter until termination, but that access was conditional on the regular payments being kept up. The exclusion of members on non-payment did not mean that they were being provided with no services at all. They were being provided with the same services as before, namely, the right to access to the facilities provided they paid the monthly fees.

Having regard to the economic realities and to all the circumstances in which the transaction had taken place, the taxpayer had been supplying its services conditional on proper payment in accordance with the contract in return for the overdue monthly payments, whether the overdue payments had related to a part of the commitment period itself or to months after that period had ended (see [35], [39], [42], [43] of the judgment).

Revenue and Customs Comrs v Aimia Coalition Loyalty UK Ltd [2013] 2 All ER 719 applied; Apple and Pear Development Council v Customs and Excise Comrs: 102/86 [1988] 2 All ER 922 adopted; Tolsma v Inspecteur der Omzetbelasting Leeuwarden: C-16/93 [1994] STC 509 adopted; Revenue and Customs Comrs v Loyalty Management UK Ltd: C-53/09 and C-55/09 [2010] All ER (D) 98 (Oct) adopted; MacDonald Resorts Ltd v Revenue and Customs Comrs: C-270/09 [2010] All ER (D) 200 (Dec) adopted; Lebara Ltd v Revenue and Customs Comrs: C-520/10 [2012] STC 1536 adopted.

(3) The services provided by the taxpayer to its members in exchange for their monthly payments were and remained at all times the right to access the taxpayer’s facilities as a function of the membership of the club. The fact that members did not pay and were excluded did not mean that the payment had not been made in return for the right to access the facilities (see [40], [42], [43] of the judgment).

Decision of Upper Tribunal (Tax and Chancery Chamber) [2013] All ER (D) 39 (Nov) reversed.

David Scorey (instructed by PwC Legal LLP) for the taxpayer; Hui Ling McCarthy (instructed by the General Counsel and Solicitor to the Revenue and Customs Commissioners) for the Revenue.