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Replies to Queries - 3

18 February 2003
Issue: 3895 / Categories:

Whose round is it?

Whose round is it?

Our sports club has been using the bar facilities at the local pub, but we are now in the process of converting an old building into a clubhouse. I appreciate that if this was to be a membership-only club any profit would not be subject to corporation tax. I understand, however, that some clubs are able to obtain an open licence which allows the public entrance to the club. If the club were to obtain such a licence, would this make the profit liable to corporation tax? Practically, it will be impossible to segregate bar receipts between members and non-members.

Readers' advice on this issue will be appreciated.

(Query T16,158) - Clubber.


Once the clubhouse is operating, any profits earned from the club selling drinks to members or their guests will not be taxable by virtue of the mutuality principle.

Where an open licence is obtained and drinks are sold to non-members, any profits made from that activity will be subject to tax. This follows on from the decision in Carlisle & Silloth Golf Club v Smith 6 TC 198 where fees paid by visitors were held to be assessable to tax.

On this basis, 'Clubber' might consider that it would be a good idea for everyone to be made a member on entering the club. However, every such member would have to have full access to all the facilities enjoyed by the members for profits on related bar sales to be tax free. Consequently, if the membership fee is quite substantial, the members are not going to want everyone else using those facilities for free.

'Clubber' states that it will be impossible to split bar receipts between members and non-members, but if the bar staff have knowledge of who is and is not a member this would not be the case. In that event, modern tills can be set up so that when entering a sale you can identify if it is a sale to a member. The till roll could then be printed off identifying the amount of sales to members, so the balance of takings would be the amount sold to non-members.

'Clubber' will have more difficulty in allocating purchases and overheads between members and non-members, and I would advise him to approach the local Inspector to agree a rationale for allocating costs. For purchases, it may be possible to agree a margin to apply to non-member sales to arrive at the taxable gross profit.

For overheads, the position will be more difficult and the allocation will depend on the facts as to how the clubhouse is to be operated. Some overheads may have to be split in the ratio of sales made; others may be allocated entirely to members and some may relate only to non-members. For overheads relating to the premises, the calculation may be more difficult as one might have to allocate costs between members-only areas and those where anyone can go on a square footage basis. Then one could apply the sales ratio to the amount of overhead allocated to the area of the building that non-members can use.

For some overheads, the Inspector might try to refuse a deduction on the grounds that it is a fixed cost which the club would have been required to incur for the members and so the use of the club by non-members has not added to that cost. In this case, 'Clubber' indicates that one of the ideas behind constructing the clubhouse is to gain revenue from non-members. Therefore use by non-members was an integral part of the decision to incur the overhead and so a proportion should be allowed as a deduction.

This is the sort of work that the Inland Revenue's Company Taxation Manual alludes to when, at paragraph CT3926, it states that where a golf club has assessable visitors' fees, 'a reasonable proportion of the course overheads may be deducted'.

My experience of this sort of work has been with golf clubs and the receipt of green fees, but in such cases the Inspectors have all taken a reasonable stance, allowing us to produce a framework that is fair and not unduly onerous to the club. - Hodgy.


When the away team goes into the local pub, they may put together a 'kitty' but the exchange of money and drinks with the 'kitty' holder does not constitute trading. That mutual relationship is what enables a club to escape tax in its dealings with members.

In Westbourne Supporters of Glentoran Club v Brennan SpC [1995] SSCD 137 there were members and associate members, the latter lacking voting or management rights. That distinction did not invalidate the privileges attached to mutual trading. However, in Fletcher v Jamaica Income Tax Commissioner [1972] AC 414 there were hotel members paying a levy by reference to their guest numbers. It was held that the hotels were not truly mutual members.

In large cities, some entertainment clubs may admit strangers by issuing supposed temporary membership, but it is unlikely that any such device would be compatible with the proposed open licence or indeed be recognised for tax purposes. The segregation of receipts from non-members might be attainable if there were an admission charge for non-members, offering a basis for apportionment, but there seems no other way out for 'Clubber'.

As regards VAT, Customs and Excise Notice 701/1/95 goes to show that most supplies are likely to be standard rated. The increased turnover looked for through public admission could end up with a need to register, so the anticipated scale of business should be considered before embarking on too ambitious a project. - Bear.


Extract from reply by John Price:

Don't forget the VAT issue! The playing membership subscriptions of a members' club are exempt. However, even if the expected bar takings, together with any other taxable supplies, will not exceed the registration limit, a proportion of the input tax being incurred on the conversion costs would be recoverable if the club was voluntarily VAT registered.

The extent of the VAT recovery would depend upon the facts and would probably require careful negotiations with Customs. See the reference to the mistake made by Chard Bowling Club at the end of my article, 'Casino VAT', in Taxation, 23 January 2003 at page 373.

Whether the sales are to club members or to the public, the VAT liability remains the same.

Issue: 3895 / Categories:
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