Esporta Ltd v Revenue And Customs

For VAT, whether a payment is consideration for services depends on the contractual bargain viewed through the economic and commercial reality of the transaction. Periodic-supply rules fix the tax point; they do not identify the service or alter the bargain. Where club membership continues after a payment default, the member retains a conditional contractual right to access the facilities. Overdue fees remain consideration for membership and that right, even while access is suspended, and actual use is unnecessary. This applies both during the minimum commitment period and afterwards until termination. The fees become damages only if default wholly ends the obligation to provide access.

Esporta operated health and fitness clubs under contracts requiring a minimum Commitment Period. Members paying monthly in advance who defaulted were denied access, but their memberships were not terminated and Esporta pursued the outstanding fees.

The First-tier Tribunal held that the overdue fees were damages or compensation and were not consideration for services. The Upper Tribunal held that they were consideration for services, principally access supplied during periods when access had been permitted. Esporta appealed, arguing that the Upper Tribunal had not properly addressed defaults after the Commitment Period and had failed to analyse the contract according to economic reality and Regulation 90. The central issues were whether services were supplied in return for overdue payments during and after the Commitment Period, and what those services were.

1. Disposition. The appeal was unanimously dismissed. Vos LJ gave the principal judgment; McCombe LJ and Arden LJ agreed. The court reached the same result as the Upper Tribunal, but for different reasons in part.
2. Applicable VAT principles. The court applied the requirement that the nature of a transaction be determined by its economic realities and all its circumstances, together with the requirement for a direct and immediate link between consideration and services. These principles were reflected in [2010] STC 2651, [2013] STC 784, [2011] STC 412, [1988] STC 221 and [1994] STC 509. The contractual terms were the starting point, subject to assessment of whether they reflected the economic and commercial reality.
3. Regulation 90. Regulation 90 of the Value Added Tax Regulations 1995 altered the tax point by treating periodic services as separately supplied at specified times. It did not determine the nature of the services or the consideration. Those questions remained governed by the contract and the general VAT principles.
4. Continuing conditional right. The Commitment Period was a core contractual term intended to enable investment in facilities. The monthly payments were consideration for membership and a continuing right to access the facilities, conditional on proper payment. Consistently with Kennemer Golf [2002] STC 502, actual use was unnecessary where the service consisted in making the facilities and associated benefits available.
5. Effect of default. Suspending access for non-payment did not alter the nature of the bargain while membership continued. The member remained entitled to obtain access as of right by paying the arrears, unlike a member of the public or a member whose contract had been terminated. The overdue fees therefore remained subscription payments and were not damages or compensation.
6. Timing and nature of the supply. The analysis applied to fees arising during the Commitment Period and to later months. The Upper Tribunal erred in treating later fees as consideration retrospectively allocated to months of actual access. Unlike Ashbourne [2011] EWHC 1237 (Ch), the contract did not expressly relate each payment to access in a particular month. The supply was the continuing conditional right of access, not merely actual use and not the provision of facilities for the collective body of members.
7. Qualification. If default terminated membership and wholly abrogated the obligation to provide access, a subsequent claim for fees during a notice period would be damages rather than consideration for services. Arden LJ also noted that an arrangement apparently requiring payment without any return might raise an issue of artificiality for VAT purposes, but that issue was not taken by HMRC.

• Court of Appeal (Civil Division): appeal dismissed. The court held that overdue monthly fees remained consideration for membership and a conditional right of access. [2014] EWCA Civ 155
• Upper Tribunal (Tax and Chancery Chamber): held that overdue fees were consideration for services, but analysed them as relating to access supplied during earlier months.
• First-tier Tribunal: held that overdue fees were damages or compensation for non-performance and that no output tax was due.