It is always difficult to know how to start any article regarding tax as invariably, many readers will switch off at an early stage. However, hopefully the title of this article will at least keep your attention for a little while.
As a VAT specialist, I am constantly being asked questions regarding the liability of certain supplies and almost always initial answer is that “it depends on the circumstances”. When it comes to paying tax on the VAT refunds, the answer is also the same.
A brief history of golf club VAT rules
Firstly, we need to consider a bit of history regarding golf clubs and taxation. As some of you may know, golf clubs were originally considered to be what is known as “mutual trading organisations.” This assumes that the club is run on a basis of members’ money and for the benefit of the members, therefore any surplus at the end of the year is still the members’ money. And you cannot effectively make a profit out of yourself, no tax is payable on any surplus.
However, the downside of this is that any income not derived from the members such as interest received or rental income, is potentially taxable. For many clubs this has remained the status quo for many years. These concepts were considered at length in the case of Carlisle and Silloth Golf Club v HMRC in 1913 where mutual trading was recognised but also that income from non-members should be taxable.
This case also introduced the concept of apportioning a reasonable amount of the club’s expenses for the upkeep of the club and its course, against the non member income to determine the taxable income. Interestingly the question only arose in the case of Carlisle and Silloth Golf Club as under their lease, they had to allow non-members to play golf on the course at any time on payment of a green fee. A considerable number of visitors used the club house and played on the course each year but after a reasonable proportion of expenses were allocated against this income little if any tax liability arose.
For many years most clubs were able to rely on their mutual trading exemption and only pay tax on interest and rental income, as in many cases their green fee income was relatively small and did not attract the interest of HMRC.
The current state of VAT on golf clubs
In more recent years, HMRC have occasionally targeted golf clubs who had high levels of green fee income to see if this would result in additional taxable income. However, in most cases as in the original case when the apportionment calculations were carried out this resulted in trading losses which were then available to offset against other taxable income, thus reducing the tax take for HMRC.
That is not to say that HMRC have not found other ways of taxing golf clubs since that time. The introduction of VAT in 1973 initially brought tax income from all aspects of clubs’ activities and is only through persistent challenges of the rules since that time that have removed the liability from subscriptions and more recently, green fees. The flipside of these challenges has been to reduce VAT recoverable by clubs so overall, VAT take from most clubs is still significant.
So now we have the latest position from HMRC. In accordance with the rules set out in the Silloth case, they have identified that the income from green fee refunds should be treated as non-member income and is therefore taxable. In addition, any interest paid thereon also represents income from non members and also should be taxable.
For clubs who currently are taxed on the mutual trading basis, it is likely that just the interest received will be taxable in the year in which the refund was made. However, it is highly likely that HMRC will take this opportunity to review the corporation tax computations that are prepared on this basis and demand that these be revised to include some apportionment.
Clubs now have three points to consider:
- Firstly, do they try to maintain their mutual trading status despite a substantial windfall from non-members and wait for HMRC to raise an enquiry?
- Secondly, as with clubs who are already carrying out apportionment calculations, do they include the VAT refunds, but in addition, claim additional deductible expenses and allowances as this income will be a significantly larger proportion of their income for the current year?
- Thirdly do clubs consider preparing their corporation tax calculations on a full corporation tax basis but in addition reclaim the full tax allowances on all eligible capital expenditure and possibly go back and create tax losses in the previous years to offset against the surplus in the current year.
Your income should dictate your actions
Which option to consider will very much depend on the projected future income of the club. If a club anticipates only generating small surpluses, then the apportionment basis may remain as the best option or alternatively, mutual trading if HMRC permit this.
Clubs who anticipate significant surpluses or extra income from outside sources in future years may well benefit from full corporation tax computations as the better option. The downside of changing is that this is almost certainly a once only decision as HMRC will be unlikely to agree to any future changes.
Overall clubs will need to be much more careful regarding their corporation tax position in future years, therefore seeking the advice and guidance of a qualified accountant is necessary.