The Kenya Revenue Authority has lost an appeal against Members Golf and Sports Clubs based in Kenya where it required them to be subjected to Value Added Tax on the membership and subscription fees they get from their members.
KRA through the commissioner in charge of Domestic Taxes filed the appeal in the High court contending that the Golf Clubs in the country are making golf facilities where their members are paying the subscription and entrance fees hence making it a taxable supply.
They argued in their submissions that the clubs charge subscription and entrance fees to members as consideration to be able to access the facilities and the amount therein is the taxable value.
It follows therefore that whether or not they are philanthropic entities, they are undertaking a business and they are explicitly outside the exemption.
They further argued that the sports clubs attempt to import into the dispute Section 21 of the Income Tax Act to remove themselves from the realm of performing a business and is utterly misguided.
“As that business from the Income Tax Act is treated differently from business in the VAT Act and the two pieces of legislations are distinct and cannot be relied on interchangeably.”
Golf Clubs and Sports Clubs in Kenya had enjoyed and continued VAT exemption on these fees until 2017 when KRA started demanding VAT on the fees and sent them Tax demands.
The clubs filed their respective objections to the said Tax Demands where the objections were overruled by KRA in its objection decisions thereby prompting the clubs to file appeals in the Tax Appeals Tribunal (TAT).
Their appeals succeeded and the Tribunal in its judgement which was delivered on March 27, 2020, upheld the club’s objections and set aside the impugned Tax Demands and objection decisions.
At the Tribunal, the Tax Authority submitted that in 2016 and 2017 it undertook a compliance check on the clubs to establish compliance with various tax laws.
The check established that the clubs were not charging VAT on club entrance fees and members’ subscription fees.
The clubs argued that they were exempt from VAT by dint of paragraph 11 part II of the first schedule of VAT Act 2013 in terms of public notice No. 20 of 2001 that exempted them.
The argument was countered by the Tax Authority by saying notice was issued under legislation that was later invalidated and that the Value Added Tax Act (CAP 476 Laws of Kenya) provided for the exemption of entrance fees and subscription fees from VAT.
The Tribunal in its judgement determined that “if an item is not tax-exempt or zero rated and the implication is that it is standard rated there can be no implication or intendment in tax matters and the VAT act exempted the entrance fee and the member’s subscription fee from the Act.”
Dissatisfied with the judgment, KRA filed appeals seeking to set aside the judgment and substitute it with a judgment dismissing those appeals and upholding the said tax demands and objection decisions.
In their submissions, the respondents asserted that they promote the game of golf and other sporting activities which fall under the category of hobby or leisure activity hence it is an endeavor that is not a taxable supply.
Further, they indicated that the entrance/joining fee and the member’s subscription fee cannot be considered as trade since that payment is meant for and is used to maintain those facilities.
They also argued that even if Public Notice 20 of 2001 was revoked due to the statutory instrument Act KRA failed to inform it prior of the intention to impose tax on the subject fees until 2017.
They further maintained that they are merely welfare organizations as opposed to profit-making ones as there are no profits made from the entrance fee (joining fee) and members subscription fee, no dividends distributed and no losses apportioned to members.
Therefore by the charging of these fees not having engaged in business, no taxable supply was made for instance the subscription fees are meant to ensure that at any time the welfare services can be accessed by the members.
In resting their respective cases, they concluded that the Tribunal properly interpreted the provisions of the VAT Act with regards to whether tax should be charged on the joining fees and subscription fees of Golf Clubs and Sports Clubs, thus the Tribunal did not err at all in its decision.
In determining the matter, Justice Nixon Sifuna indicated that “the appellant’s argument that the said legitimate expectation on the exemption of the entrance fee and subscription fee be deemed to have been extinguished by the VAT Act 2013, is unconvincing and without rational basis.”
He also stated that the appeal lacks legal basis or lawful justification hence the appellant’s sudden demand of VAT on the subject fees fails and the judgement delivered by the Tribunal on March 27, 2020 was upheld.
