The Court of Appeal has held that late fees paid for membership of a health and fitness club run by Esporta were consideration for a supply for VAT purposes, even though members were denied access to those facilities if they were in arrears with membership fees (payable monthly in advance) and such payments were not compensation for breach of contract. The Upper Tribunal’s decision was upheld but on a different basis.
The essential factual background elements are that a member is required to sign up for a minimum commitment of 12 months or longer (the Commitment Period) and pay the fees in advance either for the whole Commitment Period or by monthly direct debit instalments.
The appeal was concerned with those members who pay monthly in advance and who default on their payments. In that situation Esporta deactivates the member’s swipe card within five days through its central data system denying the member access to its clubs. It does not, however, terminate membership but ultimately seeks to recover the outstanding membership fees for the remainder of the Commitment Period or until the expiry of a three month notice termination period if the Commitment Period has ended.
The First-tier Tribunal had initially decided7 that late paid fees were not consideration for a supply of services. The Upper Tribunal disagreed with this view8 and based its own decision on the basis that the monthly payments were generally to be regarded as consideration for supplies of services by Esporta, namely membership and the grant of the right to enter the premises of the club and to use the facilities and services provided there. The issue then was whether Esporta did anything in return for the late paid fees. Counsel for the appellant had contended among other things that payment of overdue fees could not be paid in respect of
the club’s services that had been denied to the payer of the fee and that there was no direct and immediate link between an overdue payment for that month and access to the club’s facilities.
The Court of Appeal had careful regard to the terms of the relevant membership contracts. Lord Justice Vos, who gave the lead judgment, referred to cancelled hotel booking cases which, in his view, exemplified the point (see Société thermal d’Eugénie –les-Bains v Ministère de l’Économie, des Finances et de l’Industrie9 and Customs and Excise Commissioners v Bass plc10). He said at paragraph 33:
“The analogy between cancellation and payment default is not exact, but in both cases one analyses the contract when it was made, and it is only if the cancellation or default results in the obligation to provide the service being completely abrogated that a service is not supplied for the purposes of the VAT Directive … in our case, if Esporta were to terminate the membership for default in making a monthly payment and deny access no service could ever be provided, because under no circumstances could the member ever gain access to the gym facilities as of right under the contract.”
Thus, the Court held that 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 maintained. Because their membership contracts continued, the members remained (even after default) entitled to access to the club’s facilities provided they paid what was due under their contracts. Having regard to the economic realities and to all the circumstances in which the transaction took place, Esporta was supplying its services conditional on proper payment in accordance with the contract in return for overdue monthly payment, whether the overdue payments related to a part of the Commitment Period itself or to a period after that period had ended.
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