How membership VAT works
The VAT Rules for Membership Organisations
The VAT rules for membership organisations can be complex. To understand them its important to understand the basics of VAT and the differences between exempt and zero rated supplies in particular. If you are unsure then read my guide to the basics of VAT
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 was traditionally printed matter provided to members but can not include electronic publications,
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 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. A recent case where HMRC tried unsuccessfully to prevent the exemption applying to a charity was the Halle case
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. If you get into a dispute with HMRC over the exemption take advice. For details of my experience see Membership VAT advice
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 have 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 maybe permitted in law as opposed to 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 is 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 dispute. It is harder to challenge HMRC view on a concession that 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. I accept however that the growth of electronic publications, not within the zero rate make this less likely.
Apportionment for Printed Matter
The apportionment most commonly applied reflects printed matter provided to members. For example magazines or journals. When supplied in a printed form these have a zero rated VAT liability. If provided electronically they do not.
Making zero rated supplies is helpful. If you have a standard rated subscription such 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 iargely 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
Importance of Taking Advice
There are a number of interlinked VAT issues that impact on membership bodies including the correct VAT liability and the most appropriate apportionment method for the subscription. In addition there are also the normal charity and not for profit VAT complications such as whether there is non business activity and selecting the best VAT recovery method. With so many complex issues involved it pays to take professional advice. In my experience I can normally improve the VAT position of a membership organisation. To see how I can help membership organisations see Membership VAT Advice
If you haven’t already done so I would recommend reading the HMRC notice on membership VAT issues : Notice 701/5 Clubs and Associations
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