VAT only comes into play if you pay "for" something. In that case we call the payment "consideration" for a supply, and VAT applies (assuming it involves a business and is not exempt). Obviously there can be cases where the payment you make was never intended to be for anything, and that is usually a donation or gift. But what happens if you pay under a contract for services (or goods) which you did not receive, because of your own failings?
This can happen in the case of certain clubs, such as health or sports clubs (though it can be any kind of club in theory). You will often pay an entry fee and then periodic subscriptions which you must continue to pay in order to maintain access to the club facilities. In some cases, the consequences of defaulting on your regular payments is that the doors of the club are closed to you until you resume payment. And in that case you lose, for ever, the access you paid for. In other words, if you fall behind you must, both, get up to date, and continue to pay in order to recover access to the facilities for the remainder of the contract. You lose the period you eventually pay for. If you never pay those subs, you are barred from ever regaining access.
Membership itself may not actually cease, but the benefit of it is postponed and you sustain a real loss of utility, because you never recover the loss of use in your period of default. Of course, you might never have used the facilities even if you had paid on time, but in that case you would at least have had the choice of using them. Where that opportunity is maintained then a supply is made for the payment irrespective of a failure to take it up. But that is a potentially critical distinction, because when you default, you lose that opportunity for the time being.
You owe the subs whether or not you care to continue to access the benefits. That is a matter of contract. You may have detested the club, but once signed up, you must pay up.
So, assuming you do finally pay the arrears (and whether or not you choose to continue as a member after the catch up - which in the case quoted below, only 1% of you would do) are they subject to VAT as far as the club is concerned as a payment for a service, or is your payment damages for breach of contract instead? The latter would not be subject to VAT, not because it is damages as such, but because it involves no supply being made in consideration of the late paid subs (because you had not been allowed to use the facilities).
The case of Esporta (TC1475) dealt with this question. HMRC argued that a supply continued under the contract. People paid to be members and their membership never lapsed. The facilities were maintained so that they could use them once they had caught up on their subs. They did not have to pay another joining fee once they had caught up. The fact that only 1% of the defaulters came back into the fold was irrelevant.
The taxpayer said that the subs in question did not give access to facilites for the period in question. The doors were shut. When the payments were finally received there was no prospect of the supply for which they might have paid being supplied. The payments could only be due under contractual obligations, and not for services as such. Accordingly they were outside the scope of VAT. Maintaining facilities was beside the point as these were maintained for the non-defaulting members. The fact that the defaulters did not need to pay the entry fee if they resumed their payments was irrelevant as the entry fee was just a business model aspect, and there was no supply made by reference to there being no need to make that payment.
The tribunal confidently backed the taxpayer. There was no supply. The doors were shut. People who paid in these circumstances paid to make good on contractual obligations but not for a product.
And that means there is no VAT on such payments.
The matter is likely to be appealed, but intuitively it feels correct, and may represent an opportunity for clubs in an identical position.
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