Why governments shouldn’t be applying VAT on exercise services
By Gareth Kobrin
In these unsettling times, these three things are certain:
One. Never has personal health and fitness been more important.
Two. We want our governing bodies to create policies and rules that encourage good health.
Three. We have to stimulate small businesses so that they thrive.
Interestingly, we can use VAT as a tool to achieve all three of these goals. This article will explain how.
A Brief VAT Chat
If your business is registered for VAT, you might already know that you have to charge VAT when you make taxable supplies of any goods or services. Furthermore, different kinds of goods and services require different VAT rates. And certain services and goods don’t have VAT applied at all.
For example, VAT is not charged on goods or services that are:
- exempt from VAT
- outside the scope of the UK VAT system
VAT and Sport Policies
In the EU, there is a VAT exemption on ‘sports services’, but this only applies (in general) to non-profit organisations. This means that businesses who provide exercise services for money (whether provided in-person or online), need to charge VAT on these services. That’s if they cross the revenue threshold required for VAT registration.
At an EU level, the sporting exemption is for those provided by non-profit making bodies (although ‘non-profit’ is not quite clearly defined, the principle behind this is – as above – the promotion of activity in the public interest, so the exemption is in context of supplies made by public bodies).
However, governments have the option to apply a “reduced rate” for VAT purposes on certain goods and/or services. One only needs to look at how quickly governments were able to provide tax provisions and easements during the Covid pandemic to see how easily reductions and deferments can be made.
Furthermore, in some countries, they have the authority to zero-rate these exercise services. Ultimately, this would mean that even for supplies that are taxable, the provider will not need to add 20% of UK VAT.
Also, it is important to realise that a supplier does not “earn” any VAT they charge to customers.
Spinning for VAT
So let’s use the example of a spin instructor to illustrate this VAT breakdown. If a spin instructor charges £20 for a class (before VAT), they need to add 20% and charge £24 in total. This makes the class more expensive for the spinner. However, the spin studio still earns only £20.
Ditching the VAT ‘Cycle’ on Sports Services
In a scenario where we are trying to encourage people to get fit and healthy and want small businesses to thrive, there is a very convincing argument that government(s) should make exercise services either a reduced rate or zero-rated for VAT purposes.
The usual motivation for tax offices to implement reduced or zero rates is because the goods or services are deemed “good for society”. For example, in the UK, food and drink for human consumption is usually zero-rated as well as certain medical products and services.
Good for Society
So why not reduce or zero rate VAT on exercise services? It seems odd that a gym membership or yoga studio – which are far better for society than another fast food franchise – should still have to charge VAT.
The problem is that currently gym memberships run by private/corporate organisations do not qualify for that VAT exemption. They cannot zero-rate their services and must charge the full 20% of UK VAT despite the fact that they should be deemed as services that are valuable to society and are within the public interest.
Therefore, instead of only reducing VAT rates on hospitality services (which is what most tax offices have done in order to stimulate that badly-effected industry), wouldn’t we all benefit from VAT rates being reduced on exercise services?
If government ditches the VAT on exercise services, not only will it help stimulate the small businesses and several start-ups who have emerged (mostly online), it will also make the exercise cheaper and therefore create the incentive for citizens to get healthier.
[tax-free] food for thought.