Esporta Ltd v Revenue And Customs [2014] EWCA Civ 155

[2014] EWCA Civ 155Case No A3/2013/1619
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE UPPER TRIBUNAL (TAX AND CHANCERY CHAMBER)
JUDGE GREG SINFIELD AND JUDGE EDWARD SADLER
FTC/12/2012
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate Tuesday 25 th February 2014
Before
LADY JUSTICE ARDENLORD JUSTICE McCOMBELORD JUSTICE VOS
Between
Esporta LimitedAppellantThe Commissioners for Her Majesty’s Revenue and CustomsRespondents
(Transcript of the Handed Down Judgment ofWordWave International LimitedA Merrill Communications Company165 Fleet Street, London EC4A 2DYTel No: 020 7404 1400, Fax No: 020 7831 8838Official Shorthand Writers to the Court)
Mr David Scorey (instructed by PwC Legal LLP) for AppellantMs Hui Ling McCarthy (instructed by the General Counsel and Solicitor to HM Revenue and Customs) for Respondents
Judgment
[1]The issue in this case is whether late paid fees for membership of a health and fitness club are properly to be regarded as the consideration for a supply of services for VAT purposes, or whether they are, instead, damages or compensation for breach of contract.[2]The First-tier Tribunal (Dr K Khan and Mr Julian Stafford FCA) (the “FTT”) decided that such late paid fees were not consideration for a supply of services, but the Upper Tribunal (Judge Greg Sinfield and Judge Edward Sadler) (the “UT”) decided that they were.[3]The Appellant, Esporta Limited (“Esporta”) operates a number of health and fitness clubs which members of the public can join. The essential elements are that a member is required to sign up for a minimum commitment period of 12 months or longer (the “Commitment Period”), and pays the fees in advance either for the whole Commitment Period or by monthly direct debit instalments. This appeal is concerned with those who pay monthly in advance, and who default on their payments. Upon that occurring, Esporta turns off the member’s swipe card within 5 days through its central data system, denying the member access to its clubs. It does not, however, terminate the membership, but ultimately seeks to recover the outstanding membership fees for the remainder of the Commitment Period or until the expiry of a 3 months notice termination period if the Commitment Period has ended.[4]The underlying question that both tribunals had to consider was whether there were any services which Esporta provided to the defaulting members in return for the payment of the overdue fees, and if so what precisely were those services. The FTT’s answer was that there were no such services, because the overdue fees were paid as compensation, whilst the UT said that the service was the provision of access to the gym facilities during the part of the Commitment Period for which that was in fact permitted.[5]Esporta appeals the UT’s decision with permission from the UT on two grounds. First, it contends that the UT did not deal with the main factual situation upon which Esporta relied where the member defaults after the end of the Commitment Period. Secondly, Esporta contends that the UT ought to have construed its terms and conditions according to the economic reality and taking into consideration Regulation 90 of the Value Added Tax Regulations 1995 (“Regulation 90”). Had it done so, the UT would have regarded each monthly payment as consideration for the usage of the gym facilities for that specific month, and not for the whole Commitment Period, meaning that there was no direct and immediate link between an overdue payment for that month and access to the club’s facilities, because such access had in fact been denied.[6]The Commissioners for Her Majesty’s Revenue and Customs (“HMRC”) have issued a Respondents’ Notice contending that the service supplied by Esporta to its members was not merely the grant of access to its facilities, but also making available and maintaining facilities for the collective body of members including those in default. In argument, Ms Hui Ling McCarthy for HMRC refined that contention so as to submit that monthly payments were provided on terms and conditions which included the right to withhold access for non-payment. Where access was withheld, the overdue payments were still properly to be regarded as being in return for access to the facilities, which members could still obtain as of right provided they paid up their arrears.[7]I have concluded that this latter refined contention is the correct analysis for reasons I shall shortly give. It means that I would dismiss the appeal, but for reasons that differ from those adopted by the UT.

The FTT’s Decision

[8]The FTT decided that members were paying their membership fees in order to gain access to the gym. The monies recovered as arrears due under the contractual documentation represented compensation or damages for non-performance of the primary obligation to make monthly payments. The FTT held that the services were dependent on the payments, which were linked to the supply, which was access to the facilities. Those services ceased 5 days after the default in payment. Since there was no direct and immediate link between the payment of overdue membership fees and the services provided by Esporta, no output tax was due.

The UT’s Decision

[9]The UT held that the FTT was wrong in a number of respects. It based its own decision on the holding that the monthly payments were generally to be regarded as consideration for supplies of services by Esporta, namely membership and the grant of the right to enter the premises of the club and to use the facilities and services provided there, subject to availability. The terms and conditions provided that the membership fee was payable for the duration of the Commitment Period regardless of the actual use of the facilities. The issue then was whether Esporta did anything in return for the late paid fees.[10]The UT did not think that each monthly fee was consideration for the right to access the facilities for the month to which it related, because the member agreed to remain a member for the Commitment Period and to pay the monthly fees throughout that period.[11]The standard terms and conditions made the monthly payments part payment or instalments of the membership fee for the Commitment Period, so that the payment of an outstanding monthly instalment was part of the consideration for services actually supplied during the Commitment Period. The example given by the UT in paragraph 33 of its decision made clear that it was deciding that overdue fees for months 4 to 12 were consideration for the access to the facilities that had actually been supplied in months 1 to 3. It said that the fact that the right of access was denied for some months during a default did not break the link between the late paid fees and the services provided by Esporta when access was allowed during the Commitment Period.[12]Right at the end of the UT’s decision, it said the same analysis applied where the unpaid fees were recovered after the Commitment Period had ended as then the payment was also late payment for services that had been supplied during the Commitment Period. It is not entirely clear to me that this sentence was addressing head-on the point raised by Esporta as its first ground of appeal in respect of unpaid fees after the Commitment Period has ended.

Legislative Background

[13]Article 2(1)(c) of Council Directive 2006/112 (the “VAT Directive”) provides that the supply of services for consideration by a taxable person is subject to VAT. Article 24(1) of the VAT Directive defines a supply of services as “any transaction which does not constitute a supply of goods”. Section 5(2)(b) of the Value Added Tax Act 1994 defines a supply of services as “anything which is not a supply of goods but is done for a consideration ...”.

The relevant authorities

[14]It is common ground that, in determining the nature of a supply, regard must be had to the economic realities and to all the circumstances in which the transaction takes place (see Revenue and Customs Commissioners v. Loyalty Management UK Ltd (Case C-53/09 and C-55/09) [2010] STC 2651 at paragraph 39, and Revenue and Customs Commissioners v. Loyalty Management UK Ltd [2013] STC 784 per Lord Reed at paragraph 38).[15]It is also common ground that there must be a direct and immediate link between the consideration and the services provided (see MacDonald Resorts Limited v. Revenue and Customs Commissioners (Case C-270/09) [2011] STC 412 at paragraphs 13-14 and 17, Apple and Pear Development Council v. Customs & Excise Commissioners (Case 102/86) [1988] STC 221 at paragraphs 11-15, and Tolsma v. Inspecteur der Omzetbelasting Leeuwarden (Case C-16/93) [1994] STC 509 at paragraph 14).[16]Mr David Scorey, counsel for Esporta, emphasised that the remuneration received by the service provider must constitute the value actually given in return for the service supplied to the recipient (see Lebara Limited v. Revenue and Customs Commissioners (Case C-520/10) [2012] STC 1536 at paragraph 27).

Regulation 90

[17]Regulation 90, upon which Esporta places reliance, provides as follows:- “(1) Subject to paragraph (2) below, where services … are supplied for a period for a consideration the whole or part of which is determined or payable periodically or from time to time, they shall be treated as separately and successively supplied at the earlier of the following times-(a) each time that a payment in respect of the supplies is received by the supplier, or(b) each time that the supplier issues a VAT invoice relating to the supplies. (2) Where separate and successive supplies of services as described in paragraph (1) above are made under an agreement which provides for successive payments, and the supplier at or about the beginning of any period not exceeding one year, issues a VAT invoice containing, in addition to the particulars specified in regulation 14, the following particulars- (a) the dates on which payments under the agreement are to become due in the period, (b) the amount payable (excluding VAT) on each such date, and(c) the rate of VAT in force at the time of issue of the VAT invoice and the amount of VAT chargeable in accordance with that rate on each of such payments, services shall be treated as separately and successively supplied each time that a payment in respect of them becomes due or is received by the supplier, whichever is the earlier…”. (a) each time that a payment in respect of the supplies is received by the supplier, or (b) each time that the supplier issues a VAT invoice relating to the supplies. (a) the dates on which payments under the agreement are to become due in the period, (b) the amount payable (excluding VAT) on each such date, and (c) the rate of VAT in force at the time of issue of the VAT invoice and the amount of VAT chargeable in accordance with that rate on each of such payments,

The issues

[18]It is not convenient to consider the issues precisely as the parties formulated them. This is partly because HMRC refined its central contention on its Respondents’ Notice in the course of oral argument. Against this background, it seems to me that the court has to consider the following issues:- i) Did the UT fail to deal with the situation where the member defaults after the end of the Commitment Period? ii) Having regard to the economic realities and to all the circumstances in which the transaction took place, was Esporta supplying any services to its members in return for overdue monthly payments which had fallen due(a) during the Commitment Period, and(b) after the end of the Commitment Period? iii) If so, what were those services?

The terms and conditions

[19]The relevant terms and conditions are comprehensively dealt with in the FTT’s decision at paragraphs 6-10 and 28-45, and I do not intend to repeat them here. It is, however, necessary to consider in a little more detail a few of the terms upon which the parties placed particular reliance. I set out here those terms taken from the 2005 terms and documentation, which are accepted to be substantially similar to the 2009 and 2010 versions.[20]Clause 1.1 of the 2005 terms and conditions provided as follows:- “1 Membership 1.1 Duration When you join the Club you are agreeing to remain a member for a Commitment Period. For administrative reasons this period covers the rest of the calendar month in which you join (if you join after the first day of the month) and the following 12 full months. The Commitment Period is a core term of membership necessary to allow us, as a private club, to commit to the level of investment required in providing equipment and facilities to the standard expected by our members. If you choose to pay your membership fees monthly your Club membership will continue automatically after the Commitment Period. If you choose to join the Club by paying your Commitment period membership fee in advance your club membership will terminate automatically on expiry of that Commitment Period”.[21]Ms McCarthy submitted that this term demonstrates that membership is for the entire duration of the Commitment Period, and that this provision must be distinguished from the payment options that allow for either monthly or annual payments to be made. Mr Scorey, on the other hand, focused on the terms that make clear that members have a choice of paying their subscription monthly or for the whole Commitment Period at once.

(h) of the Welcome Pack that says:

“[m]emberships paid monthly must be paid in advance by direct debit, including any increase in membership fees made under the terms and conditions. Membership fees paid annually must be paid on or before the start of the anniversary month”
. Mr Scorey said that members could choose between “monthly membership” and “annual membership”, and that it is commercially obvious that monthly members are paying for access to Esporta’s facilities for that month. When defaulting members, whether during the Commitment Period or thereafter, are denied access, Mr Scorey submits that their later payment of overdue fees cannot be in respect of the club’s services that have in fact been denied to them.[22]I turn then to deal with the issues that are raised on this appeal.[23]It is not right to say that the UT ignored this point. It addressed it in the final sentence of paragraph 34 where it said, as I have already recorded, that the same analysis applied where unpaid fees were recovered after the Commitment Period had ended “as then the payment is also late payment for services that have been supplied during the Commitment Period”.[24]In my judgment, however, this sentence does not explain what the late payment of a monthly instalment made, perhaps years, after initial Commitment Period is made in return for. It does not seem to me that such a late paid monthly fee can properly be regarded as being paid in return for access to facilities during the Commitment Period. It is this that, in my judgment, poses a serious problem for the UT’s analysis.[25]In any event, the main question remains to be dealt with under issues 2 and 3 below.[26]In my judgment, the starting point is the decision of the Court of Justice of the European Union (“CJEU”) in Kennemer Golf & Country Club v. Staatssecretaris van Financiën (Case C-174/00) [2002] STC 502 where it was held that annual subscription fees paid in advance were consideration for services provided by the club even where those facilities were not used at all. The CJEU referred at paragraph 40 to the services being the “making available to its members, on a permanent basis, of sports facilities and associated advantages and not by particular services at the members’ request”. It is, therefore, clear at least that the club’s facilities do not need actually to be used by the member for there to be a supply of services.[27]Mr Scorey placed some reliance on the factually similar case of The Office of Fair Trading v. Ashbourne Management Services Ltd [2011] EWHC 1237 (Ch) where Kitchin J (as he then was) said this at paragraph 107:
“The OFT contends that, from the moment the consumer enters into the agreement, he is under a contractual obligation to pay the full price for the whole of the minimum membership period and that this obligation is discharged in instalments. I disagree. Upon entering into the agreement the consumer does commit himself to making monthly payments for the whole of the minimum period. But these payments are made each month for continuing access to the club’s facilities. As the agreements expressly provide, each payment relates to a particular month during which those facilities will be made available”
. As the final sentence makes clear, however, there the agreement expressly provided that the monthly payments related to the monthly supply of the facilities. That is not so here. In any event, Kitchin J was not considering the question that arises before us.[28]I should also deal with the point on Regulation 90, which I regard as something of a red herring. Regulation 90 provides that where services are supplied for a period for a consideration payable periodically, those services “shall be treated as separately and successively supplied” at certain designated times. As Ms McCarthy submitted, that merely has the effect of modifying the tax point for VAT purposes by deeming the services to be separately and successively supplied at the earlier of the time that payment is received or a VAT invoice issued. It delays Esporta’s obligation to account for output tax to HMRC until it actually receives the payments. It says nothing about the nature of the services in exchange for which the payments are made, but seems instead to throw attention back to the contract under which the services are supplied.[29]In my judgment, therefore, the question needs to be determined from the clear principles that are common ground between the parties and that I have already referred to.[30]Esporta’s terms and conditions make it clear that the Commitment Period is a core term of the membership. The reason is clearly stated, namely to allow Esporta to invest in proper facilities. The commercial and common sense deal between the member and the club is that it will provide good quality facilities that the member can use during the Commitment Period and thereafter – until 3 months’ notice is given. The Kennemer Golf case supra makes it clear that the service can still be supplied whether or not the member actually uses the facilities.[31]In these circumstances, I cannot see how, as a matter of principle, and looking at the contract at the time it was made, the default provisions in the contract should affect the underlying analysis of the services that are to be provided in consideration for the fees. The default provisions are just that – steps that are taken when, unexpectedly, the member fails to comply with his payment obligations. They would not be expected to change the nature of the services that are to be supplied in consideration of the payments the member has agreed to make.[32]This point is exemplified by the cancelled hotel booking cases to which we were referred in oral argument. Cancellation, like non-payment, only changes the services that a payment is to be made in return for, when it prevents those services ever being provided. Those cases demonstrate that the question of whether the deposit for a hotel booking is to be regarded as in consideration for the supply of services under the VAT Directive depended on the contract. If the deposit is expressed to be payable as part of the consideration for the first night’s stay, then there is no adequate direct and immediate link between the payment and the service, if the room is cancelled. In that case, no accommodation will ever be provided. But if the deposit was paid as an administration fee, it would be paid in return for a service. Moreover, a person, who books a hotel room on terms that the deposit is part payment for the stay and then fails to show up, is also making the payment in return for a service, namely the hotel keeping a room available for the guest. See Société thermale d’Eugénie-les-Bains v. Ministère de l’Économie, des Finances et de l’Industrie (Case C-277/05) [2008] STC 2470, and Customs and Excise Commissioners v. Bass plc [1993] STC 42.[33]The analogy between cancellation and payment default is not exact, but in both cases one analyses the contract when it was made, and it is only if the cancellation or default results in the obligation to provide the service being completely abrogated that a service is not supplied for the purposes of the VAT Directive. Thus, in our case, if Esporta were to terminate the membership for default in making a monthly payment and deny access, no service would ever be provided, because under no circumstances could the member ever gain access to the gym facilities as of right under the contract. Any claim by Esporta after termination for non-payment for, say, fees that would have been payable during the period of three months’ notice that ought to have been given, would properly be recoverable as damages and not in return for a service.[34]Looking at the terms of the arrangements agreed between the parties in this case, I think it is clear that the monthly payments are initially made in return for the services to be provided during the whole Commitment Period. The services in question are the membership of the club and the right to access its facilities. But it does not seem logical to me to say, as the UT did, that a late paid fee in respect of month 12 of the Commitment Period can properly be regarded as part consideration for right of access to the club that was granted in, say, months 1 to 3, before the default began. Rather, the late paid monthly fees remain consideration for the membership and right of access throughout the Commitment Period.[35]In my judgment, the contract provides for the member to be allowed access to the facilities in return for the monthly payments during the Commitment Period and thereafter until termination, but that access is conditional on the regular payments being kept up. The exclusion of members on non-payment does not mean that they are being provided with no services at all. They are being provided with the same services as before, namely the right to access to the facilities provided they pay the monthly fees.[36]The fact that the conditions provide for a member’s exclusion for non-payment does not put that member in the same position as any other member of the public or even a terminated member. The member of the public has no right to demand access to the facilities even on payment of fees. The club can choose if it wants to contract with him. The same position prevails if the club terminates the membership. In the case, however, of members whose membership contracts continue, they remain even after default entitled to access to the club’s facilities provided they pay up what is due under their contracts.[37]If members default and Esporta excludes them, that has no effect on the nature of the bargain; nor can it turn overdue subscription payments which are and were directly and immediately linked to the usage of the gym facilities into damages for breach of contract. The overdue payments are and remain overpaid or unpaid subscription payments that can be collected by action as monies due under a contract. They are not collected as damages or compensation for breach of contract.[38]It does not matter, in my judgment, whether one is considering the Commitment Period or any other period after it ends. After the termination of the Commitment Period, the monthly payment is indeed consideration for membership and access to the facilities for that month, but that does not affect the above analysis.[39]I would, therefore, hold that, having regard to the economic realities and to all the circumstances in which the transaction takes place, Esporta was supplying its services conditional on proper payment in accordance with the contract in return for the overdue monthly payments, whether the overdue payments related to a part of the Commitment Period itself or to months after that period had ended.

Issue 3: If so, what were those services?

[40]As I have already said, the services provided by Esporta to its members in exchange for their monthly payments are and remain at all times the right to access Esporta’s facilities, as a function of the membership of the club. I am not persuaded that those services can properly be described, as Ms McCarthy did initially in her Respondent’s Notice, as simply making available and maintaining facilities for the collective body of members including those in default. That seems to me to fall foul of the need to look at the economic reality of the arrangements. Members would not, I think, regard their subscriptions as being paid in return for the club providing facilities for members generally. Members pay to be allowed access to those facilities themselves, and to be members of the club themselves. But that does not mean that they do not have a clear commercial understanding that such access is conditional on timely payment of the monthly instalments. As I have sought to explain, the fact that members do not pay and are excluded, does not mean that the payment has not been made in return for the right to access the facilities.

Disposal

[41]I also agree with Arden LJ’s judgment, and for the reasons I have given, I would dismiss this appeal.[42]I agree with both judgments.[43]I also agree and I am very grateful to Vos LJ for his dealing with the issues so clearly and succinctly. I wish to follow through the point made in paragraph 14 of his judgment about economic realities. It means in my judgment that the contractual terms are the starting point, and that the court has to consider whether those terms reflect the economic and commercial reality of the transaction.[44]In the present case, in my judgment, it is improbable that a member would agree to make late payment of a monthly instalment for which she or he obtained absolutely nothing. The more likely scenario is that, if a member wished to pay for membership by monthly payments, she or he had to accept Esporta’s terms that payments were made for each month for the whole of the Commitment Period and until the three-month notice period had expired, irrespective of having access to the facilities. Esporta’s commercial position was that it needed that agreement in order to provide facilities of the right standard. It was hardly likely that it would have offered nothing in return for the promise to make monthly payments.[45]What Esporta promised in exchange was that the member would be able to use the facilities if she or he paid the monthly payment in time. On that basis, the supply was the right of access, conditional on payment, and not actual access, as the FTT held. There was thus a direct and immediate link between the supply and the monthly payment.[46]If the terms of the contract between Esporta and its members had the effect for which Mr David Scorey contends, and the First-tier Tribunal (the “FTT”) held, then, if HMRC had taken the point, the court might have to have considered whether the arrangement was artificial for VAT purposes. If it was, it would have been open to abuse and the court would have to have considered whether to redefine the contractual terms for the purpose of establishing the true nature of the supply for VAT purposes.[47]In my judgment, the Upper Tribunal was therefore right to define Esporta’s supply as the grant of the right to enter and use the facilities conditional on paying the monthly fee. From this, the Upper Tribunal went on to take the example of a Commitment Period starting on 1 January for which the member paid the monthly payments for January to March. The Upper Tribunal then held that in respect of the subsequent months, for which no monthly fee was paid at the appropriate time, those fees, if recovered, were “consideration for the service that has been supplied which in this example is the right to use the club premises and use facilities in January, February and March” (Decision, paragraph 33).[48]Like Vos LJ, I consider that the Upper Tribunal erred in expressing that conclusion. There was a continuing supply of a conditional right to use the premises throughout the period of membership, that is, the Commitment Period and the period up to the date of expiry of the notice period. That supply takes place even if the member does not exercise his right to make a payment in order to gain actual access. The supply does not, therefore, have to be related back to actual use of the premises in January, February or March.[49]The Upper Tribunal would have been right if it had referred to January to March simply as the months in which Esporta provided actual access to facilities.[50]I, too, would therefore dismiss this appeal.

Cited in 14 later judgments

and 5 more of the most senior