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HMRC internal manual

VAT Valuation Manual

Specific applications: apportionment and valuation of membership benefits: compulsory, "permanent loans" with potential payment on cessation of membership

Variations on this theme are what can loosely be described as “permanent loans”. Members are required to lend a specified sum to the club which is only repaid upon cessation of membership. No interest is paid during the currency of the membership but, when it ceases, the ex-members receive a sum greater than that originally lent - perhaps based on intervening inflation.

The member’s repayment actually comes from two sources: his original sum is repaid by an incoming member’s payment being transferred across to him, and the club pays the “extra”. The loan is therefore “permanent” because the same amount is always available on loan to the club. Clubs have adopted this scheme to reduce the VAT that they would be liable to account for if the payments were levies. When members pay a sum to which there is no right of return, VAT arises on the whole of that sum. However, this arrangement ensures that the money is returned, although the club itself never has to pay the principal back; and thus VAT only arises on the value of the act of lending, not on the sum lent.

This situation is similar to a compulsory loan with minimal interest, as described in VATVAL11550. The member makes a loan and receives a one-off monetary benefit. Thus, when the notional interest calculation is applied, the club has to be given credit for this one-off payment. This is achieved by applying the notional interest calculation - as described in VATVAL11540 - but then deducting money actually paid to outgoing members in the preceding year from the gross total, before applying the VAT fraction to what remains.