Taxation of Club Checks
Free drinks for members
No income tax liability arises where free drinks are provided to members attending events such as the Annual General Meeting, annual dinner or similar club functions.
Drinks provided to committee members – “duty drinks”
Clubs are not normally liable to income tax in respect of free drinks provided to committee members who are carrying out club duties. However, clubs must be aware of the non-cash voucher legislation, under which HM Revenue & Customs has, in the past, raised assessments on clubs.
A non-cash voucher is defined as “any voucher, stamp or similar document or token capable of being exchanged for money, goods or services.” HMRC has, on occasion, sought to assess clubs on the face value of each check, being the retail selling price of the drink for which the check could be exchanged. Such assessments have been successfully challenged, as the legislation provides that the taxable benefit is measured by the cost incurred by the club in providing the benefit, not its retail value. That cost includes VAT and is typically significantly lower than the selling price.
Clubs should strictly prohibit the sale or transfer of duty checks by committee members to other members or visitors. Any such sale would increase the taxable benefit from the club’s cost to the face value of the check and could expose the club to additional tax liabilities.
Procedures to reduce income tax exposure
The area of concern for HMRC relates primarily to free drinks provided in return for duties performed (for example, committee members or doormen). Where drinks are provided without the issue of checks, vouchers or any item capable of being construed as a voucher, the non-cash voucher legislation does not apply.
However, such arrangements must be carefully controlled to avoid abuse and stock losses. The following procedures are commonly adopted to mitigate risk:
While it is not possible to guarantee that any particular method will not be challenged in the future, experience suggests that these arrangements have been effective where properly documented and controlled.
Alternative approach – PAYE compliance
A club may continue to issue duty checks and manage the tax position through PAYE, provided appropriate procedures are followed. Where committee members complete starter declarations and have unused personal allowances, no income tax may arise in practice.
Provided that any earnings or benefits received from the club remain below the lower National Insurance threshold, no National Insurance contributions will be due.
Value Added Tax and club checks
Free drinks for members
Free drinks provided to subscribing members at events such as AGMs or annual dinners do not constitute business entertainment, as they are effectively funded out of members’ subscriptions. Accordingly, no additional VAT is due on such supplies. VAT will, however, be chargeable on any amount paid where drinks are supplied at a reduced price. Input VAT incurred on these supplies may be reclaimed.
Drinks provided to committee members – “duty drinks”
For VAT purposes, drinks provided to committee members in return for duties performed constitute a barter transaction, with the committee member’s services forming non-monetary consideration. Consequently, VAT is due on the normal selling price of the drinks supplied, even where no income tax liability arises. Input VAT on the drinks remains recoverable, subject to the club’s partial exemption position.
Overall observation
The taxation of club checks and free drinks is an area where the law has long been settled, but where poor controls or informal practices can still give rise to avoidable disputes with HMRC. Clear procedures, proper records and consistency in application remain essential.