No VAT on recovered fees

Members of Esporta health and fitness clubs could pay their membership fees via a monthly direct debit. If an individual’s payment was not made the membership card was blocked so that he or she could no longer access the club although the membership remained intact.

Esporta would then send debt-notification letters to the member and ultimately would use a third party debt-collection agency.

The company claimed the sums recovered from defaulting members by the agency were not consideration for a taxable supply of services because defaulters had been denied access to the club branches: so there was no link between the money paid by the member and the club’s facilities.

Esporta said the payments were damages or compensation for breach of contract and were therefore outside the scope of VAT.

HMRC argued that preventing a defaulting member from using facilities did not affect the link between membership and...