HMRC had accepted that where ‘Results’ members paid the first year’s annual fee in monthly instalments, the £53.95 difference between £593.45 (the upfront cost for the year) and twelve instalments of £53.95 was consideration for an exempt supply of credit valued at £4.50 a month. These members paid £593.45 for annual membership and £53.95 in order not to pay for it all in advance. The issue under dispute concerned the second and subsequent years where the terms and conditions of a Results membership just required payment of £53.95 to be made monthly and did not offer the option of the lump sum annual payment. The taxpayer argued that in the later years £4.50 a month was still exempt as a separate supply of credit. HMRC did not accept that assertion and this was upheld by the First-tier Tribunal (FTT).
Results was the only category of membership with the annual fee option (for the first year only). Other categories of membership, with lower minimum membership periods had higher joining fees and higher monthly fees than Results. After the initial 12 months a Results membership would continue monthly, and could be cancelled if three months’ notice was given.
Where a supplier gives his customers the option of paying for something, (in this case an annual gym subscription that was subject to VAT), in full when payment falls due, or by instalments, HMRC accept that any additional charge for paying by instalments can be exempt as a charge for credit. This can make a major difference to the VAT due (the total sums at stake in this case exceeded £400k in a four year period). There are other non VAT issues to consider with any such arrangements – the Consumer Credit Act must be complied with for instance.
In this case gym members that opted for the Results membership category (minimum membership period of a year) were given the “pay in full up front or by monthly instalments option” for the first year of membership and HMRC accepted there was a charge for credit made to those who opted to pay in monthly instalments and paid some of the claim. The problem arose in subsequent years, as the terms and conditions simply required any Results members who wanted to continue membership to pay monthly and to give three months’ notice of cancellation. That is to say there was no contractual obligation after year one, to pay for an annual subscription in advance. So the FTT agreed with HMRC and concluded that, on renewal, when there was no longer any minimum membership term, the Results members merely paid for monthly membership and as they only paid when the money was due, they received no supply of credit, even though there was no reduction in the amount of the monthly instalments in year two. This meant Results members who were paying monthly paid £4.50 a month for credit and £49.45 a month for membership in year one, but paid £53.95 a month, for membership only, in year two. To access the decision click here.