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HMRC internal manual

VAT Business/Non-Business Manual

Clubs and associations: examples of shares, loans, bonds and debentures giving membership benefits

This page of the manual gives ten examples of situations in which a club has linked its supply of membership benefits to either the provisions of a loan, or the purchase of a share, bond, or debenture, by the member. Before reading this page please read the introduction paragraph of page VBNB60420.

These ten examples illustrate the principles of:

  • determining the value of membership supplies; and
  • distinguishing between monetary and non monetary consideration.

The list is not exhaustive. If none of the examples relates to your situation you should go back to page VBNB60420.

Example 1

Club A charges its members subscription of £500 a year. Members are told that for the following year they are expected to make a donation of £100 to the club when renewing their subscriptions. Everybody makes the donation apart from two members. Their membership renewals are refused and they have their £500 subscription cheques returned to them.

Treatment: The £100 is non-returnable and has to be treated as an additional subscription. Consideration for the supply of membership benefits is wholly monetary and is £600 for each member. The ‘donation’ is a compulsory levy.

Example 2

Club B asks its members to make a loan of £100 each to it. No interest is paid to those who lend the money and the money becomes repayable after three years. The money is repaid if the member leaves before the three years are up. After three years, the member can call for their money back at any time. Subscriptions are £500 each year whether the particular member has made a loan or not.

Treatment: The £100 is a voluntary loan. No VAT is due upon it because it is not part of the consideration for the supply of member benefits. The subscription of £500 is the consideration for the membership supplies.

Example 3

Club C charges the members a subscription of £500 each year. It asks members to purchase bonds for £200 each. No interest is paid on the bonds which become payable after five years. A member can sell the bond back to the club at any time after the first year. Those members who buy bonds only have to pay a subscription of £400 each year until the bonds are repaid.

Treatment: The £200 bonds represent a voluntary loan to the club. Membership benefits are supplied in return for two alternative considerations:

  1. a £500 subscription,
  2. a £400 subscription and provision of loan by purchasing a £200 bond.

a is wholly monetary consideration and VAT will be paid on the £500.

b Is partly monetary and partly non-monetary. VAT will be payable on the £400 and the club will also be required to account for VAT on the value of making a loan by purchasing a bond. The latter’s value will be £100 because this is the difference in the rate of subscription paid by bondholders and non-bondholders.

Example 4

Club D is just being formed. It is possible to become a member in two ways:-

(a) By paying a £600 joining fee and £500 annual subscription.

(b) By purchasing £1,500 of shares and £500 annual subscription. These shares satisfy the requirements for exemption contained in the VAT Act.

Treatment: There are two types of consideration.

  1. The £600 joining fee and £500 subscription - wholly monetary consideration, £1,100 taxable.
  2. The purchasing of shares and £500 subscription - partly monetary and partly non-monetary consideration. VAT will be due upon the £500 subscription and the club will also have to account for VAT on a further £600 in respect of each share-purchaser. The value of the non-monetary consideration is again the price differential, which in this case is represented by the joining fee. Share purchase is voluntary because you can still become a member without it. However, it still constitutes an alternative non-monetary consideration.

Example 5

Club E is also in the process of being formed and has adapted Club D’s scheme. It does not charge any joining fee (unlike all other clubs near it which charge £600). There is an annual subscription of £500. However, all members have to be nominated for membership by a shareholder. Shares cost £10,000 each and satisfy the VAT Act definition of exempt securities. Someone who has bought a share is able to nominate himself for membership. Subsequent purchasers of shares from the original holder can also nominate members but someone who ceases to hold shares must resign from the club.

Treatment: You cannot become a member unless you have been nominated by a shareholder. This can only take place if someone has purchased a share. The right to nominate a member is supplied to a share purchaser when they receive exempt share entitlements. Therefore the £10,000 is monetary consideration for a standard rated right and an exempt financial security. This means that the £10,000 will have to be apportioned between the two supplies. Since this club does not charge any joining fee, £600 could provide a starting-point for valuing the standard rated supply. (See notional joining fee calculation at paragraph 7.4 of V1-12 Valuation).

Example 6

Club F insists that all its members purchase a £100 debenture. It will be repaid when a member leaves the club or dies. No interest is paid while the debentures are held by the members.

Treatment: The debentures are compulsory. Therefore lending money to the club by the act of purchasing one is additional non-monetary consideration that members must provide in order to obtain the supply of membership benefits. The club receives the benefit of an interest free loan. In this case the notional interest calculation as described in paragraph 7.4 of V1-12 Valuation would be applied on the basis that the value of the use of the money to the club is the amount of interest that they would have had to pay if the loan had been obtained from a bank or similar institution.

Example 7

Club G has heard about Club E’s scheme. Their scheme is exactly the same as Club E’s except that Club G charges a £1,000 joining fee.

Treatment: The payment for the share is monetary consideration for exempt and standard rated supplies (a financial security and right to nominate a member). The notional joining fee calculation is inappropriate because a joining fee is charged. If such a case is encountered, please refer to Deductions and Financial Services Team.

Example 8

Club H asks its members to lend it £100, £200 or £300, interest free for a period of five years. The members who do not lend money are told that they must pay a surcharge of £60. Everyone pays an annual subscription of £500 but the surcharge is varied as follows:

Amount lent £300 -– surcharge nil.

Amount lent £200 -– surcharge £20

Amount lent £100 -– surcharge £40.

Treatment: Although the loans are not compulsory, they are still part consideration for the membership supplies. Membership benefits can only be secured in one of three ways:

  1. payment of a £500 subscription and £60 surcharge,
  2. payment of a £500 subscription, reduced surcharge and lending £100 or £200,
  3. payment of £500 subscription and lending £300.

The £60 surcharge has effectively become additional subscription. It is a non-returnable levy and will have the same liability as the £500 subscription proper. It is monetary consideration. Lending £300 is non-monetary consideration. The value of this will be £60 because that would be what a member who makes no loan has to pay on top of his £500. Where £100 or £200 is lent the value to be attached to lending the money will correspond to the amount of surcharge reduction. This is £20 for £100 lenders and £40 for £200 lenders.

The club should therefore account for VAT on the £500 subscriptions, £60, £40 and £20 surcharges and upon a further £60 for £300 lenders, £40 for £200 lenders and £20 for £100 lenders.

Example 9

Club I asks its members to purchase £200 bonds that carry no interest and are repayable at any time upon demand. Annual subscription is £500. Those purchasing a bond only pay £400 a year. New members joining after 1 January cannot join unless they purchase a bond but their subscription is still £500 a year.

Treatment: This club has created three consideration alternatives for the membership supplies.

  1. Existing members purchasing a bond: Consideration is £400 (monetary) and providing the club with a loan by buying a bond (non monetary). Club should account for VAT on the £400 and a further £100 for each purchaser.
  2. Existing members not purchasing a bond: Consideration is £500 (wholly monetary). Club to account for VAT on the £500.
  • c. New members: Consideration is £500 (monetary) and provision of loan by buying the bond (non monetary). This category of member is a new subscription class. The value of the non monetary consideration cannot therefore be arrived at by comparison with the earlier membership categories. Bond purchase is compulsory for this new class of member so the notional interest calculation as described in paragraph 7.4 of V1-12 Valuation is appropriate.

    Example 10

    Club J stipulates that members must loan £200 to retain their memberships. It pays 0.5% interest per annum on the loans.

    Treatment: The loans are compulsory. Notional interest calculation applies to establish a value for this non monetary consideration. The club can reduce the amount upon which VAT is due by deducting the 0.5% interest that it has actually paid from the percentage rate used in the notional interest calculation.