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AGCO Letter to David Gauke MP, Exchequer Secretary to the Treasury

August 24, 2011 By

David Gauke MP,
Exchequer Secretary to the Treasury,
HM Treasury,
1 Horse Guards Parade,
London SW1A 0AA

August 19th 2011

Dear Mr. Gauke,

Taxation of Golf Clubs

As chairman of the Association of Golf Course Owners I have been passed letters you have sent to Members of Parliament whose constituents have raised their considerable concerns over the VAT treatment of proprietary golf clubs and the Corporation Tax treatment of member-owned clubs. Those clubs have asked me to respond to you and I am also sending a copy of this letter to the Rt. Hon. Danny Alexander MP, to our association’s constituency MP, Jonathan Djanogly, and to Edward Davey, MP for Kingston upon Thames, who is very well versed about this issue.

The situation on VAT is complex and we have been battling this since 1993. I appreciate that you have only been an MP for a comparatively short time and I would urge you to look at the history of the problem. There are some 900 proprietary golf clubs in England plus a smaller number in Northern Ireland, Scotland and Wales. Of these we would estimate that some 600 face possible bankruptcy or severe financial difficulties as a result of the UK Government’s steadfast refusal to address the issues. Problems are blamed on Article 13 of the Sixth Directive. In reality the Conservatives created the mess 20 years ago and Labour made it worse in 1999. As a body we have now had enough; if the Bridport case is not successfully appealed it will be the kiss of death to most small proprietary golf clubs and we do not deserve it.

As you are new to this game let me put you in the picture. The UK Government has had a disastrous approach to the taxation of sport for over 20 years.

  1. The UK Government withdrew zero rating for the construction of sports facilities in 1989. They could have kept zero rating and it was not an EU requirement to withdraw it. Probably it cannot now be restored. This has a huge bearing on the VAT treatment of golf clubs
  2. The UK’s basic obligation was to exempt sports subscriptions to non-profit making bodies – Article 13A(1)(m)
  3. The UK could have made the exemption conditional on it not being likely to create distortion of competition – Article 13A(2)(a), fourth indent.
  4. The UK Government failed to consider the distortion and failed to enact any national law to solve this. AGCO has a wealth of correspondence from 1993 protesting about the distortion that would arise – to Michael Portillo, when he was Chief Secretary to the Treasury,  to Customs and Excise and numerous constituency MPs. The Conservative Government took no notice and allowed the distortion to arise.
  5. Through the mid 1990’s AGCO clubs tried to level the playing field and leased or licensed their golf clubs to their members. This would have allowed their members to enjoy VAT exempt golf and enable proprietary clubs to compete on a level playing field with member-owned clubs. You should be aware that the English Golf Union (EGU) stipulated that there must be a members’ club at any proprietary club, so this was not unreasonable. Clubs at Abbotsley (my club) and Chobham in Surrey successfully defeated Customs and Excise when they challenged us. (LON/96/148) and (LON/96/833)
  6. Customs and Excise/Labour Government fought back with the VAT (Sports, Sports Competitions and Physical Education) Order 1999. The whole purpose of this piece of delegated legislation was to attempt to ensure that proprietary golf clubs could not license their golf courses to their members. It brought in a phrase “subject to commercial influence”. It took 2 years to draft this legislation because the governing bodies of golf and smart member-owned clubs suddenly realised that they too might get caught in the VAT net. Please would you take time to read the report of the Standing Committee meeting of 26th October 1999. It will show you the protests made by Conservative and Liberal Democrat MP’s to this legislation, to the on-going distortion and their objection to the “subject to commercial influence” nonsense. Edward Davey and Oliver Letwin were particularly vocal in defence of proprietary clubs. Dawn Primarolo (as Labour’s Paymaster General) concluded by saying, “Our objective is to reduce the distortion caused by the current VAT treatment and the difference between commercial and non-profit-making clubs”.
  7. Twelve years later and with a change of government still nothing has been done. It would be unreasonable not to familiarise yourself with that debate from October 1999 now that the ball seems to be in your court. You will see from that debate that Dawn Primarolo conceded to Oliver Letwin that she had not consulted with AGCO but they had listened to golf’s governing bodies.
  8. You should be aware that when 700 or so new proprietary golf clubs were built in the late 1980’s and early 1990’s they, as proprietary clubs, were not allowed to affiliate to the EGU. UK Sport and Sport England recognise the EGU as the governing body of golf in England and listen to them. A proprietary club could not affiliate in itself to the EGU but had to have a separate club of its members, formed by its members, with designated rules, committees and officials. It is those members’ clubs that affiliate to the EGU. As such the EGU does not represent proprietary clubs per se. Nor do golf’s other governing bodies.
  9. Now proprietary clubs are faced with the possibility of the Bridport case, if not successfully appealed, giving a massive tax windfall of some £300 million to member-owned clubs. The Scottish Golf Union and the Golf Club Managers’ Association (both of whom successfully bend the ear of HMRC on behalf of member-owned clubs) have voiced their enthusiasm for this possible tax windfall, without any concept that it will be the kiss of death to most proprietary clubs. Had the Conservative Government taken up the issue of distortion in 1993 when AGCO first flagged it up, and had Labour listened to our protests in 1999, the taxpayer wouldn’t be facing the possibility of this £300 million hand-out.
  10. We say that the UK Governments have ignored the underlying principle for applying the exemptions which in the old Article 13 and in the more recent Article 131 from COUNCIL DIRECTIVE 2006/112/EC quite clearly say “ ….. which the Member States shall lay down for the purposes of ensuring the correct and straightforward application of the exemptions and preventing any possible evasion, avoidance or abuse.” You should be aware that the “subject to commercial influence” clause from the 1999 legislation is so absurd that a club like the Berkshire Golf Club Ltd in Ascot has taken £8.3 million in green fees from visitors since that absurd piece of legislation and is still considered not to be “subject to commercial influence”. In 2009 they took £850,000 of visitors’ fees. This is more than the total turnover of most small proprietary clubs. Their members still enjoy VAT exempt membership subscriptions. Ours don’t.  In your own constituency, Moor Park Golf Club in Rickmansworth takes some £500,000 a year in visitors’ green fees, sells itself out for all manner of golfing and other commercial events and is still considered not to be “subject to commercial influence”. Their members still enjoy VAT exempt membership subscriptions. And then there is Royal St. George’s Golf Club in Kent, which hosted the 2011 Open Championship. They, like Sunningdale Golf Club in Ascot, charge £300 for a day’s golf. The absurdity of VAT legislation and the mess both Governments have permitted doesn’t categorize them as “subject to commercial influence”.
  11. The original wording of Article 13 gave the UK Government power to make the exemptions for sport subject to the condition of not producing distortion. It was supposedly optional in VAT law, though perhaps mandatory in competition law. That I don’t know. The UK Government didn’t take up the option to avoid distortion – to AGCO clubs’ detriment.
  12. The more recent Article 131 and 132 repeat the exemptions and the conditions. Perhaps the UK Government can now admit that it has seen the light of day and distortion is a problem and withdraw the exemption based on the condition (d).
  13. What does appear to have changed is that the Preamble to the whole document clearly recites at (4) that regulations should not distort conditions of competitions. The rest of the Preamble is quite firm on stamping out distortion. It appears that it is no longer just an option to stop distortion but that it is now mandatory and has been since 2006 and the UK Government is still not applying VAT law to sports clubs correctly.
  14. Article 98 sets out quite clearly that member states can apply the reduced rate of VAT to certain goods or services set out in Annex III.  The reduced rate of VAT in the UK is 5%. As you know Annex III includes at item (13) admission to sporting events and at (14) use of sporting facilities. The following 16 countries, according to the EU, have applied their reduced rate to one or both of these sporting activities – Belgium, Czech Republic, Denmark (exempt), Germany, Greece, Spain, Ireland, Italy, Cyprus, Luxembourg (super-reduced at 3%), Netherlands, Poland, Portugal, Slovenia, Finland and Sweden.
  15. The UK Government has chosen not to apply this reduced rate of 5%. They could have done this in 2006 and at least shown some concessions to the distortion issue. The present VAT legislation from Europe suggests that there is a duty to stop distortion internally within member states and between member states. The clubs AGCO represents in Northern Ireland are now faced with distortion vis-à-vis member-owned clubs in Northern Ireland whose members enjoy VAT exempt subscriptions and proprietary clubs across the border enjoying the reduced VAT rate of 9%. If that isn’t distortion of competition, what is?

SUGGESTED SOLUTION ON VAT – THE REDUCED RATE

  1. AGCO has now posted an e-petition on the Government website asking for support to a 5% reduced VAT rate for admission to sports events and use of sporting facilities. As soon as this is approved we will be publicising it to football supporters’ clubs (including the club you support at Ipswich) and hoping for a quick 100,000 signatures to get this debated in Parliament. Walton Heath Golf Club near Epsom gives a £700 reduction in membership fees to Members of Parliament. Only one, Labour’s John Cruddas, seems to declare this. Walton Heath took £625,000 in visitors’ green fees in 2010. That is greater than the turnover of many small proprietary clubs. The membership fees there are, of course, exempt from VAT. It should be a lively debate with MPs having to declare their interests and membership of such clubs! No doubt we can get a host of stars from all sports to support the reduction to 5% on admission prices to sports events – and we can climb in on the back of it!
  2. We say that the reduced rate will effectively eliminate the distortion between golf clubs which we say the Government is obliged to do. It won’t compensate for the past but it will protect us in the future.
  3. If we have to fight our corner with the assistance of football clubs and this results in a reduced rate of 5% on ticket prices to football (and other sports) then so be it! EU legislation is clear. The Government has power to do this and doesn’t need authority from Europe.

SUGGESTED SOLUTION ON VAT – SUBJECT TO COMMERCIAL INFLUENCE

  1. The “subject to commercial influence” phrase from the 1999 VAT Sports Order was dealt with in a statutory instrument. Presumably it would therefore be quite possible for the Government to redraft that in a similar statutory instrument, now that there is the realisation that clubs like the Berkshire, with £8.3 million of visitor fees since 1999, are absurdly NOT considered “subject to commercial influence”.
  2. Our suggestion is that the UK Government follows the model used by the American Revenue Service in the way they tax country clubs and other not-for-profit organisations. Their model is simple in principle. If a country club (or other not-for-profit body) takes more than 15% of its revenue from non-members (other than rent and investments – on which there are other limits) they lose their not-for-profit status. There are clear rules to deal with the schemes and scams country clubs are likely to use to circumvent this principle. That model is presumably to achieve payment of tax.
  3. The American model means that if a visitor goes to a country club they can effectively only go as a guest of a member and it is virtually impossible for outsiders to spend money. That is how it should be for our supposedly mutual trading golf member-owned clubs in the UK
  4. AGCO suggests that we adopt a similar model but set a percentage of 10%, i.e. if 10% or more of revenue is brought into a (golf) club from non-members the club is considered to be “subject to commercial influence” – because quite clearly, using any reasonable interpretation of the phrase, that is what it is.
  5. The American 15% rate is presumably about bringing in tax revenue. Our suggestion of 10% is to stop the distortion, but the model from America is there.
  6. Clubs would have two options – either continue to take in money from outsiders, because of their commercial aims and influence, and lose their VAT exemption, or shut the doors to all but a small amount of incidental outsiders’ spending and keep their VAT exemptions. AGCO members would be content with that, combined with the reduced rate.
  7. Would it cause hardship to member-owned clubs? No, of course it would not. You will see from the accounts of the Berkshire Golf Club that they actually say they make a loss on trading from non-members. Quite how, one cannot imagine, but that is what they say. As we cannot find a single member-owned club that declares it makes a profit from non-members and pays any tax, we must assume that if they stopped trading with outsiders it would not cause difficulty.
  8. It would seem that bringing in a 10% rule would comply with the EU rules that VAT should be straightforward. The present “subject to commercial influence” phrase is a nonsense and clearly not straightforward.
  9. Can the UK Government do it? Seemingly as they brought in the VAT Sports Order in 1999 as delegated legislation and a statutory instrument it should be possible to do this.

CORPORATION TAX

  1. You say in your letters that HMRC has various manuals which show how to tax golf clubs and you don’t appear to understand that there is a problem with Corporation Tax. Put very simply we have yet to find any member-owned golf club which pays tax on its trading income. The decision in Carlisle and Silloth is 100 years old. It is still the law. It makes clear that clubs should pay corporation tax/income tax on visitors’ fees (from strangers) and not members’ guests (paid by member playing with member). The decision and follow up decisions suggested that a member’s guest is a kind of temporary member on which tax is not payable.
  2. There is no other industry where there are so many manuals referring to how HMRC should tax taxpayers. The treatment of golf clubs is unique. The ordinary tax rules are there for all taxpayers, with the allowable expenses being what is wholly and exclusively incurred in earning the income or where there is a reasonable duality of expenses.
  3. In our view the reason for these various manuals about taxing golf clubs (and not other industries) is the pressure from member-owned golf clubs and golf’s governing bodies to ensure that leading clubs would NOT pay any tax. I am enclosing with this letter a publicity document from Hillier Hopkins LLP, a firm of accountants in your constituency, in which they proudly proclaim that they act for over 30 clubs and manage to negotiate with HMRC so that the clubs are either classified as mutual trading or by using Hiller Hopkins method and calculations don’t pay any tax.  That is what it is all about. They say they act and advise the Golf Club Managers’ Association. Indeed they probably do. We have correspondence with the Inland Revenue Mutual Trading Department from the mid 1990’s in which The Inland Revenue positively found ways NOT to have to tax the great and good of golf. Again we say that golf’s governing bodies only acted for member-owned and did whatever they could to ensure they avoided paying tax.
  4. It should be absolutely clear to anyone that a club like the Berkshire Golf Club Ltd with £850,000 of visitors’ fees in 2009 should be paying tax. I appreciate that you cannot discuss the affairs of taxpayers with us. But it is clear that they don’t pay tax. It is clear that no member-owned club pays tax on green fees. The expenses of running a golf course are there for the members. The true cost of putting a visitor on the golf course is 50 pence – 25 pence for the green fee ticket and 25 pence for the scorecard. A small percentage might be paid to the professional for collecting the fees. In reality HMRC has tried to assess the expenses of having visitors on a golf course based on the rounds of golf played by members and the rounds played by visitors.  This was put forward by golf’s governing bodies to ensure their clubs did not get caught for tax. Reasonably one might assume that 5000 rounds are played by visitors to 25,000 played by members. HMRC concedes in their manuals that golf clubs in effect fabricate the rounds of golf members play and have no records. Even so it would mean that one sixth of the costs of running the course might be offset against green fees. Still they avoid tax.
  5. Other clubs simply budget for the amount of green fees they are likely to take during the year, reduce the necessary members’ subscription to allow for this subsidy, then plead to HMRC that they have no money left and still pay no tax. HMRC bend over backwards to forgive them the tax they owe.
  6. The reality is that no one in the Government or HMRC is prepared to tax our competitors. You cannot give a tax advantage to one taxpayer (unfairly) without prejudicing another.
  7. We assess that member-owned golf clubs take some £200 million a year in visitors fees; we assess that not one penny in tax on this has been paid. Bearing in mind the figures that these clubs will now produce in clawing back VAT on green fees (if the Bridport case is not successfully appealed) it should be easy to see what their visitor income has been. The simple question is then to ask why tax has not been paid on these green fees. They are happy to declare them now to get VAT back but weren’t happy to declare them to pay Corporation Tax.
  8. If dealt with correctly HMRC could recover more in Corporation Tax on undeclared visitor fees than you have to pay out in VAT if Bridport succeed.

WHO TO INVESTIGATE

Members of Parliament get their cheap subscription at Walton Heath Golf Club in Surrey. That club is one of the biggest clubs which is clearly “subject to commercial influence” (but still enjoying VAT exempt membership subs).  It is one of the highest earners on visitors’ fees (the £625,000 described in their accounts as temporary members) with no tax paid. No doubt they will be one of the top recipients for repayment of VAT if Bridport is not successfully appealed. It would seem that that club is the ideal one to investigate for a really full understanding of the tax and VAT implications involved. Presumably no Member of Parliament enjoying membership there could condone the way in which the club pays no tax and the members pay no VAT.

Perhaps it would be worth investigating all member-owned golf clubs for which Hillier Hopkins are their accountants/auditors to ascertain just how their clients avoid paying tax.

Here is what Hillier Hopkins say, “We act for many golf clubs regarding their corporate taxes and have been involved in many negotiations with HMRC regarding taxable status. For members’ clubs we have in almost all cases been able to either agree mutual trading status or a profit calculation method which reduces taxable income to zero. We have been able to advise on tax strategies going forward to main than status.”

“Robert Twydle [of Hillier Hopkins] is an adviser to the Golf Club Mangers’ Association”.

Yes, that is what it is all about. Negotiations , the old boy network and forgiving influential golf club members. Here you have it in writing from their accountant!

WHAT POLITICIANS HAD TO SAY ON THIS

I trust you will read the minutes of the First Standing Committee of 26th October 1999 which dealt with the VAT Sports Order and this tax disaster. That was when Labour was in power.

  • Oliver Letwin to Dawn Primarolo (as Paymaster General)

“I prophesy that unless the Paymaster General is promoted, as we hope, to an even grander position in the near future, she will still be dealing with the issue in two, three or more years’ time – if the present Government by some mischance remains in power.”

  • Edward Davey – Liberal Democrat MP for Kingston-on-Thames

“Proprietary golf clubs need the support of the House, because, as the Committee must acknowledge, VAT law discriminates against them. I hope that the Minister will admit that to the Committee and explain how she proposes to deliver more support to golf clubs and proprietary entrepreneurs.”

Well there we are. Mr. Letwin and Mr. Davey are now members of the Coalition Government. Nothing has changed and you are apparently the Minister who has taken over the responsibility for correcting this mess.

It may not be the most important thing on your agenda or on the Government’s agenda. But it is the most important thing on the agenda of AGCO golf club owners, many of whom have fought off bankruptcy and closure because of this thoroughly rotten distortion.

I would welcome a meaningful response from you and trust you will research this matter fully before, as I hope, our e-petition forces a debate in Parliament.

Yours sincerely,

Vivien Saunders OBE PhD LLM MSc FCMI (Solicitor – retired)

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