By Mulengera Reporters
In a 14-page judgment, Ag Judge Susan Odongo of the Commercial Division of the High Court has famously set aside the Tax Appeals Tribunal (TAT) 31st October 2023 decision authorizing Uganda Revenue Authority (URA) to enforce recovery of Shs166,541,103 from Kampala Club.
The Kampala Club has been in existence since 1912 and it mainly provides leisure, recreation and health club services strictly to its paid-up members-and not to whoever walks in. The Club has always duly paid its taxes to URA.
In April 2022, URA suddenly came up with an assessment demanding that the Club pays up VAT arrears deriving from money it collected from annual membership and subscription fees payments by members during the years 2020 and 2021.
URA’s original claim was Shs215,854,864 covering the two years. Kampala Club objected to this assessment. URA considered the objection and the assessed VAT obligation for 2020 was subsequently reduced from Shs51,217,498 to Shs39,435,306 and that of 2021 from Shs164,637,366 to Shs127,105,797. That is how the overall outstanding VAT obligation was adjusted to Shs166,541,306-up from the original Shs215,854,864.
Still aggrieved and dissatisfied, Kampala Club filed an application (no. 256 of 2022) at the TAT.
The Club, which had all along been paying its fair share of taxes (even when it’s a company limited by guarantee and therefore not for profit), asserted in its application that money collected from annual subscription and registration fees paid by its members did not constitute “taxable supplies” under the VAT Act Cap 349.
However, the TAT disagreed with them and ruled in favour of URA. The TAT decision of 31st October 2023 was protested by the Kampala Club hence their (Civil Appeal No. 0115 of 2023) appeal to the High Court whose Commercial Division has since overturned the decision.
Led by Canon Naboth Muhairwe and Daphine Ahebwa of M/s Agaba Muhairwe & Co Advocates, the Club’s lawyers submitted that the annual membership fees paid by members was meant to qualify for membership and access to the Club’s premises in order to access sports & health facilities for recreational purposes, and as such didn’t constitute “a business activity” ought to be taxable under Section 18(3) of the VAT Act. They also tendered the Club’s Constitution to demonstrate the fact that the entity doesn’t operate for profit.
It was also asserted that the money paid is solely to obtain Club membership and not for purchase of any specific service rendered.
This being generally a new area, the lawyers had to rely on comparative jurisprudence from elsewhere-including Custom & Excise Commissions vs. Lord Fischer [1981] STC 238, where annual membership contributions paid for leisure activities were held not to attract VAT.
The Judge agreed with the appellant’s submission that annual membership subscriptions didn’t amount to consideration for services rendered, and therefore not subject to tax.
That the membership fees paid merely entitle members to certain rights and privileges rather than being payment for a quid pro quo service. It’s not payment for a quid pro quo service that is subject to VAT. Reflecting on the doctrine of estoppel, the appellant’s lawyers also invited Court to inquire into why the taxman had never required Kampala Club to pay VAT on such annual membership subscription payments since its inception in 1912.
In her ruling, the Judge held against URA and made it clear that “hobby or leisure activities [similar to what Kampala Club members pay for] are primarily undertaken for enjoyment, relaxation or personal satisfaction without the dominant purpose of profit-making or structured commercial enterprise.”
The Judge added that: “In contrast, business activities typically consist of tasks conducted regularly with an intent to profit and in an organized commercial manner. Mere recreational or hobby pursuits, even if they occasionally yield income, do not constitute business activity” that qualify to be taxed.
Kampala Club activities were clearly distinguished by the Judge, agreeing with the appellant’s lawyers, to be purely for “pleasure and social enjoyment,” and therefore not constituting business activities under the relevant provisions of the VAT Act. That for a transaction to be subject to VAT, direct quid pro quo must be demonstrated to be present namely “the payment being made directly for the service rendered.”
The Kampala Club General Manager’s evidence helped to demonstrate the fact that the annual membership subscription payments are not direct payment or consideration for services supplied or rendered.
Sharply disagreeing with TAT’s finding that Kampala Club members wouldn’t be paying these annual fees without receiving services in return, Justice Susan Odongo recognized existence of non-commercial motivations for members to make annual payments. She enumerated these to include “social, recreational and communal benefits which do not necessarily amount to taxable supplies.”
Court found that such annual membership fees are an act of cost-sharing, enabling the Club to meet premises’ maintenance expenses.
The Judge also agreed with counsel’s submissions that a company limited by guarantee, like Kampala Club, offers recreational services or facilities to its members only, and doesn’t operate like profit-making commercial entities like a gym or a hotel.
The GM’s evidence demonstrated clearly that the service offered at Kampala Club is “predominantly recreational, social and communal.”
The Judge concluded that the assessed VAT liability of Shs166.5m deserved to be quashed and the TAT ruling set aside because the annual subscription is paid “for membership qualification, retention and not as a direct fee for specific services rendered.”
This is why non-payment causes one to be denied access. That the annual membership fee payment serves as “a condition precedent to enjoyment of membership rights,” and it’s not consideration for a discrete service. Non-payment results to forfeiture/suspension of membership rights, including denial of access, as opposed to the defaulter being held liable for “breach of service contract.”
The Judge held that membership fees was distinguishable from service fee.
Hence it was erroneous for the TAT members to conclude and construe payment of subscription and membership fees as constituting payment for services.
THE LARGER IMPLICATIONS:
The decision will be a source of relief for many similarly-placed non-profit, leisure and recreational associations whose subscription and annual membership renewal fees won’t be encroached upon by URA anymore, since doing so has clearly been declared illegal.
Many are already celebrating Justice Susan Odongo for making it abundantly clear that such entities or associations (limited by guarantee and aren’t for profit) won’t have to be subjected to VAT for as long as they are not for profit and for as long as there is no direct quid pro quo between the membership fees and the specific services rendered.
The judgment not only enriches Uganda’s tax jurisprudence but also unequivocally recognizes the fact that hobby, leisure and recreational activities/services offered by non-profit making entities (like Kampala Club) fall outside the scope of taxable business activities. No more ambiguity about that anymore. Membership fees paid to such entities are clearly accepted as contributions for access to membership rights and privileges, and not payments for taxable services.
URA, whose decision to wake up in 2020 and suddenly demand VAT payment on such membership fee payments for the first time yet Kampala Club has existed since 1912, will also think twice before coming up with arbitrary tax assessments.
“We welcome this decision. It provides the long-awaited legal certainty for a wide range of non-profit organizations, member-based associations and recreational clubs that have always been at the risk of arbitrary VAT assessments by Uganda Revenue Authority,” said a prominent Kampala lawyer who went on to declare the case a locus classicus decision on matters relating to the taxman’s insistence to enforce tax obligations arising from collection of annual membership and subscription fees.
The decision also distinguishes the fact that not all payments are considerations, under the VAT Act-and in the context of non-profit entities that provide recreational and leisure services for their members’ exclusive enjoyment. It also clarifies on what constitutes ‘taxable supplies’ regarding payment for ‘membership rights and payment for ‘offered services.’
The decision will also impact and inform future reforms in tax-related laws and also policy making by URA. Equally true, there is a lot that the TAT must learn from this decision, overturning their earlier one of 31st October 2023.
And this is how one big-name Kampala lawyer concluded on the matter: “By addressing whether subscription and membership fees paid to non-profit member clubs constitute a taxable supply under the VAT Act, this decision provides authoritative legal clarity, draws comparative jurisprudence and provides wide-ranging implications for similar entities, tax administration practices and future policy formulation.” (For comments on this story, get back to us on 0705579994 [WhatsApp line], 0779411734 & 041 4674611 or email us at mulengeranews@gmail.com).
