Membership Apportionments

The recent VAT tribunal concerning the Serpentine Gallery has raised important questions regarding the treatment of membership organisations. What is the scope of the Extra Statutory Concession regarding subscription apportionments and can you treat part of a subscription payment as a donation.

A membership subscription usually entitles the subscriber to a range of different benefits each of which, if supplied separately, could have a different VAT liability. The most obvious example is printed matter such as a magazine which would be zero rated. Whether the subscription should be seen as a multiple supply made up of different elements and apportioned to reflect the different VAT liabilities, or alternatively a single supply with a single VAT liability is a question that was first dealt with in the 1970s. Then it was found that a supply of membership was a multiple supply that should be apportioned.

This policy was accepted by HMCE until 2000 when a major European Court Case – Card Protection Plan, caused a policy revision. Membership was now generally to be seen as a single supply with a single liability. Yet since this would clearly cause many membership bodies difficulty HMCE agreed to introduce an extra statutory concession that allowed non profit making bodies to continue to apportion. Whether Card Protection Plan meant that a change in policy was needed is an interesting question. In my view HMCE over reacted and some membership supplies remain multiple supplies in law. But it is HMRCs view that apportionment is only allowed because of the ESC. This reads ‘ 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‘.

The wording of the ESC appears to be very clear and all encompassing. It certainly doesn’t appear to contain the qualification that HMRC gave it in the Serpentine case, that it only applies to a voting membership. I.e. it cannot apply to non voting supporter or friends schemes. If you do apply an apportionment to a subscription which does not include voting rights then it appears HMRC may challenge it. If you have no HMRC approved written apportionment method then it may pay to take advice. See my pages on the membership VAT rules :here

Can You Treat Part of a Subscription as a Donation ?

The main issue considered in the Serpentine Gallery case was whether an element of a supporters membership payment could be treated asa donation outside the scope of VAT.

In common with many arts charities, the Serpentine ran a number of supporter schemes where in return for an annual or monthly payment subscribers received a range of benefits. In all cases the value of the benefits was clearly lower than the amount paid. The supporter therefore would have perceived they were, in part, making a donation. One of these schemes had already been the subject of a written HMRC ruling where they had accepted that part of the subscription could be treated as a donation and was outside the scope of VAT.

Although they did not seek to change their view on this scheme, HMRC were not prepared to accept there was a donation element in the subscription for the other schemes they had not given a ruling on. As is common with such schemes there were a number of membership categories and the benefits were mainly self generated; attendance at special openings, breakfasts with the director, the right to buy summer party tickets etc. The value of such benefits to the subscriber is obviously rather hard to determine. Working out their cost is rather easier and assuming all benefits were taken up, it would have cost in the order of £100 to provide the benefits that generated a subscription income of between £500 and £2,500 a year. The subscriptions were excepted as being eligible for gift aid and treated as a donation in the accounts.

The issue of how to treat payments, made to charities, which are clearly in part perceived as a donation has come up before, notably in the case of Tron Theatre where all the money paid in a theatre supporter scheme was found to be taxable. Yet more recent cases have cast doubt on this and HMRC have generally been willing to treat part of a payment as a donation. This was reflected until recently in their guidance. The best known examples of this policy being subscriptions to heritage organisations that can be apportioned with an outside the scope element to reflect the fact that people join and after a few years tend not to visit many properties.

In the case of supporter schemes such as that of the Serpentine HMRC have usually allowed an apportionment, based around the value of the benefits given to the lowest membership tier. The argument HMRC put at the tribunal appears therefore to reflect a change in policy. In my view it is a shocking decision and likely to be wrong. But if you operate a similar scheme then unless you have evidence that HMRC have accepted a donation element in the past then you must be prepare to be challenged. I understand that the decision is unlikely to be appealed which is a shame as I would have thought it was winnable. But it is only of persuasive authority so the argument can be had again and hopefully won.

If you don’t want to take the risk of an HMRC challenge then it is possible to restructure. In the case of the Serpentine Gallery the terms were changed so the supporter agreed to make a small compulsory payment and paid the rest as a donation. This was accepted by HMRC. The difficulty here is of course that you cannot guarantee the supporter pays the higher amount. I suspect this is less of an issue for the schemes aimed at very high net worth individuals where there is a closer relationship between the charity and donor than at the lower end.

I can advise on all aspects of membership VAT. See membership body services