A taxing fitness case

Source: Read the full case report here: http://www.bailii.org/uk/cases/UKVAT/2009/V20933.html

The Atrium Club Ltd v. The Commissioners for Her Majesty’s Revenue & Customs (HMRC) [2009] UKVAT V20933 (London Tribunal Centre), 21 January

This an appeal against a decision by HMRC that Atrium made supplies of taxable sporting services. The case is complicated however because it concerns multiple companies – a ‘parent’ health & fitness club (Atrium) set-up in 1991 and a number of non-profit making subsidiary organisations (Atrium Health Ltd -1996, AAB Sports Ltd -2000, FAB Ltd -2003) each replacing its predecessor in order to provide exempt sporting services. By Atrium effectively leasing the premises to the new company to operate, Atrium saved VAT on its membership fees as these fees were reclassified as exempt supplies rather than standard-rated (and therefore taxable) supplies.

This was possible because under Part A of Article 13 of the Sixth Directive, certain activities closely linked to sport or physical recreation could be exempt from VAT. In 1996, consultants (AIC) employed by Atrium suggested that the fitness club could be restructured to take advantage of this rule and make the club competitive with local authority fitness clubs, and this was what happened with the licensing of Atrium Health Ltd to handle all the operational functions of the health club.

When in 2000 the rules became stricter, so a new company (AAB) was set up by another set of consultants (WJB Chiltern) in order to meet the more demanding new criteria. In 2002, this new scheme attracted the attention of HMRC and after an investigation, Customs concluded that not only were the membership fees of AAB taxable, but that  Atrium should also be held liable for abusive practices designed to evade tax.

The Tribunal held at [70] however that while the WJB Chiltern scheme was ingenious, there was no direct nexus between Atrium and the customers. All the staff and club activities belonged to AAB rather than Atrium and it was AAB that dealt directly with the customers and paid staff PAYE contributions to HMRC. Given this conclusion, it was not possible to argue that Atrium actually supplied the sporting services [84].

HMRC’s alternative argument was therefore considered, namely that this arrangement was an ‘abusive practice’ designed to obtain a tax advantage [73]. The problem with this approach is that the scheme never worked and so no tax advantage ever occurred. When HMRC liquidated AAB for non payment of tax, all its assets were transferred to a newly created company (FAB Ltd) and HMRC could not then pursue Atrium for the debt [86], as such Atrium’s appeal against the HMRC decision was allowed.