The VAT Rules for Membership Organisations

The VAT rules for membership organisations can be complex. To understand them it’s important to understand the basics of VAT and the differences between exempt and zero-rated supplies in particular.

There are two main VAT questions a membership organisation must answer.

The first is what is the main VAT liability of the membership supply they make

The second is whether it is possible to apportion the subscription. e.g. treat as part as standard rated or exempt and part as zero-rated. Typically the  zero-rated element will relate to   printed or electronic matter provided to members.

VAT Liability of a Membership Subscription

The default position is that VAT is charged on any supply at the standard rate (20%). This is unless it can be argued that all or part of the subscription should have a different VAT liability. The most likely alternative is for the subscription to be VAT exempt.

Subscriptions that can be treated as VAT exempt include those charged by professional bodies, learned societies, trade unions, political parties and philanthropic organisations. HMRC interpret these categories narrowly. For example, they hold to a very traditional view of what constitutes a profession.

HMRC will sometimes resist the philanthropic body membership exemption applying to charities. They are often wrong in doing this. In fact, they have lost a number of appeals on this subject, including ones I have been involved in.

HMRC policy on when the VAT exemption applies to membership organisations is contained in section 11 of the HMRC Membership Notice. But remember this is only HMRC policy and not the law. Its not unknown for them to make mistakes.

Membership VAT

When can you Apportion a Membership Subscription by concession?

HMRC allow charitable membership organisations that provide a package of benefits to apportion under an extra statutory concession – ESC 3.35. This used to apply to all Charity membership subscriptions. Unfortunately recently HMRC has restricted the concession so that only charities that allow voting rights can apportion their subscription. They argued this successfully in the Serpentine Gallery case.

The apportionment concession reads

3.35 VAT: apportionment of certain membership subscriptions to non-profit making bodies

Where a membership body supplies, in return for its membership subscription, a principal benefit, together with one or more ancillary benefits, it will normally have to treat the subscription as being in return for that principal benefit. This means that the body will have to ignore the liability to the VAT of the ancillary benefits and account for VAT on the whole subscription based on the liability to VAT of that principal benefit.

However, bodies that are non-profit making and supply a mixture of zero-rated, exempt and/or standard-rated benefits to their members in return for their subscriptions, may apportion such subscriptions to reflect the value and VAT liability of those individual benefits, without regard to whether there is one principal benefit. This concession may not be used for the purpose of tax avoidance.

Can you apportion a membership subscription in law?

HMRC introduced the concession when the European Court forced the UK to change its policy towards splitting supplies. The UK used to often allow supplies made up of elements with different VAT liabilities such as membership subscriptions to be split.  The new rules meant that such supplies were more likely to have a single VAT liability. This would be determined by the liability of the principal benefit provided.

HMRC issued the concession as they believed the new rules would mean subscriptions would be wholly standard rated or exempt. They would not be apportioned to reflect zero-rated printed matter. Subsequent cases have shown this may have been a pessimistic view. In some cases, an apportionment may be permitted in law as opposed to a concession.  For example, if an academic journal is provided to members of a learned society then this is ‘enjoyed’ in its own right. It is not a means of better enjoying the right to attend AGMs and attend branch meetings. In this case, I would say a case can be made for apportionment being allowed in law.

In contrast, I accept a members newsletter that merely advertises and reports on internal matters as a means of better enjoying a supply of membership rights.

The difference between apportionment being allowed in law rather than concession may be important in case of a dispute. It is harder to challenge the HMRC view on a concession than the law.

Can you have a single zero-rated supply?

The problem I have with the HMRC position is that although they envisage membership supplies are usually single supplies, they are very reluctant to ever accept they can be wholly zero rated.  This cannot be correct. It must be possible to have a subscription where the main benefit obtained is printed matter or an electronic journal.

Apportionment for Printed Matter

The apportionment most commonly applied reflects printed and electronic publications provided to members. For example magazines or journals.

Making zero-rated supplies is helpful. If you have a standard rated subscription such as an apportionment it means you can treat part of your subscription as VAT free. If you have a VAT exempt subscription, treating part as zero-rated improves your VAT recovery. In many cases, the amount of VAT recovery a membership body obtains largely depends upon their subscription apportionment method.

Any fair and reasonable method can be used to apportion a membership subscription for VAT. HMRC prefer cost-based apportionments but there are alternatives that might be appropriate such as a cover price based method. I have dealt with dozens of methods and can advise on the most beneficial and appropriate.

A basic cost apportionment might look as follows:

Cost of Producing Journal or Magazine / Cost of all membership benefits including the printed ones.

e.g.       £20,000/50,000 = 40% zero rated

Overseas Members and Brexit

When you have members in the EU that are private individual as opposed to businesses then you may have an obligation to register for VAT in an EU member state and account for VAT. This will depend upon whether you are seen to make certain supplies separately within an EU member; notably supplies of goods such as books and electronic services such as web access or e-publications.