Highlighting the VAT recovery opportunity following the Esporta case

Esporta, the health and fitness club group, has won a £1.3m tax rebate following an appeal in the First Tier tribunal. The ruling related specifically to Esporta as a leisure club, but there are wider implications outside of this sector. If your business provides minimum term contracts for services to consumers, there may be an opportunity for a similar claim, following the ruling in this case. So, why did the court come to this decision?

Paying VAT on recovered fees

The appeal concerned whether late membership fees recovered from customers who had breached their contracts should be subject to VAT. One of the main membership options offered by Esporta is monthly payments for a set period, usually 12 months. Where a customer defaults on payment during this period, Esporta informs the customer of the outstanding debt and the member’s swipe card is deactivated.  Esporta argued successfully that payments collected from members in default didn’t relate to a taxable supply. This was because the defaulting member was denied access to the club’s facilities as soon as default was recognised in Esporta's systems.

HM Revenue & Customs’ point of view

HM Revenue & Customs (HMRC) had argued that although members who defaulted on late payments couldn’t use the club, their contract hadn’t been terminated. This meant that taxable services, such as maintenance of club facilities, continued even though the person concerned couldn’t access these facilities. But the judge determined that the whole point of membership payment was to be able to enter and make use of the facilities, and membership alone couldn’t constitute a taxable supply. Late payments were effectively compensation, rather than supply of services.

An opportunity to reclaim VAT

Antonia Flockton from our Litigation team, who advised Esporta on the appeal, commented:

“This is a victory of common sense and a great result for Esporta. The case upholds the principle that compensation for loss isn’t a taxable event and should apply in situations where a subscription service is provided under similar terms. As Esporta’s case shows, the potential tax rebates can be significant, and could provide welcome respite for businesses in these difficult economic times.”

If you provide minimum term contracts for services to your customers, then there may be an opportunity to recover overpaid VAT. If you’d like to talk to us about your VAT position, you can contact Antonia Flockton on 020 7804 1957