Q:
Hi,
We sell a membership for about £40 a year, inc VAT. The service allows the members to receive discounts. We also send them a book (worth £20) and 4 magazines a year (worth in total £10), we do not currently charge them an additional amount for these extra printed materials. Do we have to charge standard rate on the full £40 cost of the membership or do we charge zero rate on the book and magazines?
Thanks,
Simon
A:
Hi Simon
Unfortunately it’s not an easy question to answer, although you’d think it would be. There are several issues to consider, not just whether or not the subscription should be apportioned between standard and zero-rated elements, but there are also certain specific rules that apply to clubs and associations and can affect the liability of the subsrciptions, which I’ve mentioned below.
Mixed or Composite Supply
First of all, about the possibilty of treating some of the subscriptions as zero-rated. There is a concept in VAT whereby supplies can be “mixed” supplies or “composite” supplies when they include elements that are both standard and zero-rated (or reduced rate although that’s not at issue here). If something is a mixed supply then the price can be split between teh different rates and you only account for VAT on the standard rated element. Typical example would be a book and DVD package. If it’s a composite supply, then it’s regarded as a single supply at the rate of the main element on the basis that the other elements are only there as ancillary to the predominant element. A good example would be an instruction leaflet provided with a new TV set – the leaflet is clearly of no value in its own account so the supply is a composite supply at the standard rate.
There is some information about mixed supplies in Section 8 the HMRC VAT Guide here http://tinyurl.com/37xkwj7. It’s not much but is a useful place to start. Unfortunately there isn’t much guidance about composite supplies and there is no simple set of rules to determine what should or shouldn’t be a mixed or composite supply. The main principle is whether or not there is a main element to the supply and the other elements are simply “for the better enjoyment” of the main element – as in the case of the instruction leaflet supplied with the TV.
There have been several court cases that have considered how you define a mixed or composite supply. Each case is different and it comes down to what the customer is getting in return for their money and the specific contractual arrangements. For example, if I join a club and there are a number of benefits to being a member, including the right to discounts plus books/magazines, then I would argue that I’m paying for a mixed supply and should only pay VAT on the part of the membership fee that relates to the standard rated elements. However if the book and magazines simply contain information relating to the discount scheme or other membership benefits (eg a list of the retailers offering discounts or explanations about how the scheme works), then HMRC would probably argue that they have no separate benefit and are simply ancillery to the membership, so there is one composite supply and the whole lot is standard rated.
These are some of the issues to consider:
• What does the member think he is getting in return for his money?
• What’s in the publications?
• Do the books/magazines have a standalone benefit apart from relating to the membership? Can they be purchased separately from the membership, eg from retailers?
• What are the formal rules of membership/contract and how are the publications treated in the contract?
• How are the publications treated in advertising/marketing relating to the scheme?
If it is a mixed supply then you need to apportion the price between the standard and zero-rated elements. There is some guidance in the VAT Guide Section 32 here http://tinyurl.com/3alvyd9
HMRC Notice: Clubs and Associations
There are also special rules relating to clubs and associations that could affect the VAT treatment of the subscriptions. There is an HMRC notice called “Clubs and Associations” here http://tinyurl.com/38ou64d that you need to look at. It contains some further guidance about mixed/composite supplies that you might find helpful (see Section 4 of the Notice).
But the other main issue is whether the subscriptions could be exempt? Certain “not for profit” organisations can benefit from exemption for membership subscriptions. The downside for exemption is that the club couldn’t recover VAT on costs relating to the membership, but in most cases this is outweighed by the VAT saving on the subscriptions themselves. You can get more information about this in the Notice.
There is a lot to think about but if the membership subscriptions are the club’s main form of income, then it’s worth spending time getting it right up front. It might be worth asking HMRC for a ruling if you want to be certain.
Marie