VAT Liability on Mixed Supplies
Beta Ltd operates a gym and health club. It charges members a monthly fee of £50 for access to gym equipment, swimming pool, and sauna. It also sells protein shakes and supplements at the reception desk. In the year to 31 March 2025, Beta Ltd's total income was £180,000 from membership fees and £40,000 from sales of supplements. Beta Ltd is not currently VAT registered. The directors are considering voluntary registration because they believe they can recover input VAT on equipment and marketing costs, which were £30,000 (including VAT) in the year. Beta Ltd's main competitor is VAT registered and charges VAT on membership. Beta Ltd's accountant has advised that gym membership is exempt from VAT, but the directors are unsure. They have asked for advice on whether to register, and if so, how to treat the membership fees and supplement sales.
1. Advise Beta Ltd on whether it is liable to be VAT registered, and whether voluntary registration would be beneficial. Show calculations and consider the exempt status of gym membership.
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Liability to register. A business must register for VAT if its taxable turnover exceeds the registration threshold (£90,000 from 1 April 2024) in any rolling 12-month period. Exempt supplies are not taxable supplies and are excluded from the threshold. Gym membership is generally exempt from VAT as a supply of sport or physical education (Group 10, Schedule 9, VATA 1994) when provided by an eligible body or as a sport facility. However, the exemption for sport is subject to conditions: it applies to supplies of facilities for sport or physical recreation made by a non-profit-making body, or by a local authority, or by a body regulated by a charity. Beta Ltd is a commercial company, so its gym membership is likely to be taxable at the standard rate, not exempt. The accountant's advice appears incorrect. If membership is standard-rated, then Beta Ltd's taxable turnover is £180,000 + £40,000 = £220,000, which exceeds the threshold. Registration is compulsory. The rolling 12-month test should be applied; if the threshold is exceeded in any month, the company must notify HMRC within 30 days and register from the first day of the second month after the threshold is exceeded.
Voluntary registration. Even if membership were exempt, voluntary registration could be beneficial because Beta Ltd could recover input VAT on its costs. However, it would also have to charge VAT on its taxable supplies (the supplements). If the supplements are zero-rated (food), no VAT would be charged, but input VAT recovery would be restricted because the supplements would be used for zero-rated supplies. The recovery of input VAT on equipment and marketing would be apportioned. If membership is standard-rated, Beta Ltd must charge VAT on membership fees: £180,000 × 20% = £36,000 output VAT, and on supplements if standard-rated. Input VAT on £30,000 of costs (assuming all standard-rated) is £5,000. The net VAT payable would be £36,000 + output VAT on supplements − £5,000. The directors should consider the impact on customers: if members are consumers, a 20% price increase may reduce demand. If Beta Ltd can absorb the VAT, profits fall. Voluntary registration is not optional if the threshold is exceeded; it is compulsory. If the threshold were not exceeded, voluntary registration would allow recovery of input VAT but would require charging VAT on taxable supplies. The decision would depend on the proportion of exempt supplies. Since Beta Ltd's supplies are likely standard-rated, registration is compulsory and the directors should prepare for VAT compliance.
2. Explain how Beta Ltd should treat the sale of protein shakes and supplements for VAT purposes, and whether a zero-rating might apply. What records must be kept?
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VAT treatment of supplements. The sale of protein shakes and supplements is a supply of goods. The VAT rate depends on whether the goods are food. Most food is zero-rated under Group 1, Schedule 8, VATA 1994. However, zero-rating does not apply to certain items, including:
- food sold for consumption in the course of catering (e.g., in a café or restaurant);
- drinks (other than milk) and preparations for making drinks;
- confectionery, chocolate, and sweets;
- savoury snacks (e.g., crisps);
- dietary supplements and similar products, unless they are specifically excluded.
Protein shakes and supplements are typically classed as dietary supplements or food preparations. HMRC's guidance (VAT Notice 701/14) states that food supplements are standard-rated unless they are a food of a kind used for human consumption that is not included in the exceptions. Many protein powders are standard-rated because they are considered dietary supplements or because they are drinks. Beta Ltd must determine the exact nature of each product. If a product is a powder to be mixed with milk or water and consumed as a drink, it may be standard-rated as a beverage. If it is a food supplement in tablet or capsule form, it is standard-rated. If it is a basic food ingredient (e.g., plain protein powder sold as a food), it might be zero-rated, but this is rare. The safe assumption is that supplements are standard-rated at 20%.
Records. Beta Ltd must keep VAT records for at least six years. These include:
- sales invoices and receipts, with VAT shown separately;
- purchase invoices for goods and services;
- VAT account showing output tax and input tax;
- records of any zero-rated or exempt supplies;
- records of gifts, samples, and business entertainment;
- records of exports and imports.
Beta Ltd should also keep a record of the VAT treatment of each product, with evidence to support zero-rating if claimed. If Beta Ltd is unsure, it can request a ruling from HMRC. Failure to charge VAT correctly can result in assessments and penalties.