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HMRC internal manual

VAT Valuation Manual

Specific applications: apportionment and valuation of membership benefits: valuation of a "nomination right" supplied with shares, bonds or debentures

Clubs sometimes sell the right to nominate a person to membership of the club with a share, bond or debenture. (Normally it will be the purchaser of the security/financial instrument that is expected to nominate himself for membership.) In those cases where the purchase price represents monetary consideration for the exempt share and a standard-rated “nomination right”, it is then necessary to apportion the overall value between the exempt and standard-rated elements.

In some cases it is possible to value the “nomination right” by reference to the charges made to non-shareholders for membership. For example, shareholders may pay a lower subscription than non-shareholders or not have to pay a joining fee like the latter. The price differential could be taken as representing the part of the purchase price attributable to the standard-rated right. However, this is not possible in cases where no such differential exists - for example, where only persons nominated by shareholders comprise the membership and there is no separate joining fee.

In those cases where there is no joining fee, it is difficult to apply either a cost or customary selling-price basis of apportionment. The provision of the right entails negligible costs but, because one cannot obtain membership in its absence, its value is not reflected by those costs. The club does not sell the right separately from the share so it has no customary selling price (ie recognised market value). A solution that we have adopted in some cases has been to calculate a value for the right by reference to “a notional joining fee”.

The “notional joining fee calculation” may be calculated as set out below - remember, this general formula may have to be adapted according to the facts of the individual case:

  1. Calculate a joining fee - consider what a joining fee for a similar club would be.

The trader can be invited to propose a figure: often based upon the average of joining fees charged by similar clubs. The clubs used for this purpose should be as similar as possible to your trader in terms of the facilities that they provide.

  1. Adapt that joining fee as necessary - consider whether there are any special factors that require the above fee to be raised or lowered.

If a facility is offered that is unique to this club the fee should be increased: if something is not offered that other clubs supply, the fee may be reduced.

  1. Calculate a “multiplier” - a multiplier now has to be calculated to apply to the above figure.

This can be based upon the potential “joinings” attached to the “nomination right”. You should treat the initial share-purchaser as 1 “joining” and assume that there will be at least 1 other subsequent “joining” upon transfer of the share to a later purchaser.

Often, a successful nominee will be entitled to nominate a relative as an associate or social member. As these receive fewer benefits than full members a fractional “joining” of (eg) 0.5 should then be added on. A further fractional “joining” may also be added to account for the fact that there may be any number of later holders of the right after the first holder and his immediate successor - 0.25 may be acceptable to add. Totalling these gives, in this illustration, a multiplier of 2.75.

You may need to adjust the multiplier to take account of the individual trader’s circumstances. Its share prospectus should have indicated any special restrictions upon the “nomination right”. For example, there may be no power to nominate an associate member, or the right may not pass to subsequent purchasers in perpetuity. Similarly, the right may be greater than is customary, perhaps allowing a shareholder to nominate two full members. The multiplier will then have to be raised or lowered as appropriate.

  1. Multiply the adapted joining fee by the “multiplier” - this will give the element of the total purchase price attributable to the “nomination right”.
  2. Apply the VAT fraction to the above figure.

This calculation cannot be used when a club actually charges a joining fee. There is a valuation problem in this situation because the customary costs and selling price valuation methods are also inappropriate. If you have a club selling shares with attached “nomination rights” and a joining fee is also charged to share purchasers/successful nominees, then you should contact the VAT Advisory team for advice.