It is not uncommon for charities to supply benefits under membership arrangements.

Sometimes these are covered by a VAT exemption relating to such bodies as learned societies, professional institutes, and philanthropic societies.  Those which do not fit these categories make supplies which are subject to VAT (unless all elements of the benefits package are exempt for other reasons).  These may be interested in the Extra Statutory Concession for non-profit membership bodies whereby the package can be apportioned to reflect the underlying VAT treatment of the specific benefits.  This in turn is useful where a benefit is printed material which is generically zero rated, and which allows for a reduction in the VAT on the subscription, or, where the benefits would otherwise be exempt, increases VAT recovery on costs.

This ‘concession’ has recently come under pressure when HMRC has said that it only applies to true members who have a democratic or constitutional involvement in the body, and not merely those with the title ‘member’ who are really mere consumers.  This was highlighted in the Serpentine Gallery tribunal decision where the tribunal asserted that supporters were not members, and that the basket of supplies they received were a single (or ‘composite’) standard rated supply of ‘association’ with the Gallery.

But we now have a glimmer of hope for charities who operate membership supplies without that level of member involvement and whose use of the ESC may be regarded as frail.  That glimmer comes from the unlikely world of motor-cycling.

Imagine a Harley-Davidson bike glinting in the distance like a mirage on a long, straight, hot, road in the American desert, riding towards you in serene splendour.  That is what Harley bikers think about a lot, and their sense of association is such that they almost never regard their bike as merely a ‘mode of transport’.  Their association with it is such that they want to ‘self-actualise’ by reference to it.  The way to achieve this is to join the Harley Owners Group.

But this club is not an entity.  It is operated in each country by the local Harley company, and is simply another product of that company.  The company sells dreams in the form of bikes, other paraphernalia, Harley holidays, local meetings and biking meet-ups, literature, and merchandise.  Harley Owners Group is part of that, and sells almost all of the above (though not the bikes, save in that the resultant loyalty drives bike sales).  There is nothing charitable about this operation.  The members of it do not direct the affairs of the company.

So, the ESC cannot have relevance to Harley Owners Group, but the issue of whether, under the law (not by concession) the membership subscription is apportionable to reflect different liabilities such as printed magazines (and, in their case, some technical points concerning the VAT treatment where members are in an overseas jurisdiction), is relevant and was the point of dispute in a tribunal case, Harley-Davidson Europe Ltd v HMRC [2017] UKFTT 873 (TC).

Happily, Harley won the case, on the basis that the package of benefits arising from payment of the membership fee could be treated as a multiple (or ‘mixed’) supply where every element is afforded its own VAT treatment.

The reason, reduced to basics, was that it was possible for members to enjoy each benefit entirely separately, and without any over-arching unity between them.  Some members really value the zero rated magazine, whereas others like the meetings, and others like the merchandise offers, and others go on the holidays which are reserved for members, and so on.  Many enjoy them all, but they don’t have to.  It was not much like the Serpentine Gallery, where the elements combined to create a sense of association for its ‘members’ with the Gallery (or so that tribunal viewed it).  Here, each element stood on its own wheels, even though the overall intention of Harley was to engender a sense of involvement and loyalty.

Many charities may be much closer to Harley than to Serpentine.  Unless HMRC appeals successfully, charities may well be able to assert that they need not rely on the ESC as the supply can be apportioned as a matter of VAT law.  This is an important case, and we will monitor any developments with fascination.

Graham Elliott is the Charity Tax Group’s Technical Adviser

Members may also be interested to CTG’s analysis of the Serpentine Galleries VAT case when the first published.