Introduction
In a landmark decision by Hon. Lady Justice Susan Odongo in Civil Appeal No. 0115 of 2023; Kampala Club Limited Versus Uganda Revenue Authority, court emphasized that subscription and membership fees paid to a non-profit organization do not constitute a taxable supply unless there is a clear, direct quid pro quo provided in exchange for the payment within a profit-oriented business model.
The background of the appeal is that the Tax Appeals Tribunal on 31st October 2023, upheld the Uganda Revenue Authority’s (URA) assessment of VAT amounting to UGX 166,541,103 on annual subscription and membership fees paid by members of Kampala Club Limited for the years 2020 to 2022.
The Club, a non-profit company limited by guarantee that operates health club facilities for its members, was assessed VAT in April 2022 totaling UGX 215,854,864 for 2020 and 2021. The Club objected, and URA partially revised the assessment reducing VAT for the years 2020 and 2021 to UGX 39,435,306 and UGX 127,105,797 respectively, bringing the total to UGX 166,541,103.
The Club challenged this revised assessment before the Tax Appeals Tribunal in Application No. 256 of 2022, arguing that membership and subscription fees did not amount to taxable supplies. However, the Tribunal dismissed the challenge and ruled in favour of URA.
The Club through its lawyers Canon Naboth Muhairwe and Daphine Aheebwa of M/s. Agaba Muhairwe & Co. Advocates appealed against this ruling in the High Court contending that such fees do not constitute a “taxable supply” under the VAT Act, Cap 349, and should not be subject to VAT. Hon. Lady Justice Susan Odongo agreed with the submissions made for Kampala Club and allowed the appeal.
Grounds of Appeal
The appeal was premised on two grounds;
- That the Honorable members of the Tax Appeals Tribunal erred in law when they found that the annual membership fees paid by the Appellants’ members are subject to Value Added Tax under the Value Added Tax Act Cap 349.
- That the Honorable members of the Tribunal erred in Law when they failed to properly evaluate the evidence and found that the Appellant was liable to pay the tax assessed.
Court’s Analysis
The appeal was allowed by court and its decision was grounded in a detailed interpretation of the VAT Act, relevant jurisprudence, and a careful examination of the evidence on record.
The Court interpreted Section 18(1) and (3) of the VAT Act, which define a “taxable supply” as a supply of goods or services made for consideration as part of business activities, excluding hobby or leisure activities. The Court emphasized that subscription and membership fees paid to a non-profit organization such as the Appellant do not constitute a taxable supply unless there is a clear, direct quid pro quo i.e specific goods or services provided in exchange for the payment within a profit-oriented business model. The Appellant being non-profit, provided services that are recreational and not commercial in nature. There was no direct consideration linking the fees to specific services and therefore, no basis for VAT liability.
The court further relied on comparative jurisprudence, including the UK case of Customs and Excise Commissioners v. Lord Fisher and the Kenyan case of Commissioner for Domestic Taxes v. Sigona Golf Club, which affirm that membership fees in non-profit recreational clubs are typically not consideration for taxable services. The Court also rejected URA’s reliance on the case of Rwaheru Akiiki & Others v. URA, holding that it was inapplicable and distinguishable from the present appeal and the decision therein was overturned by the Court of Appeal.
Ultimately, the court found that the Tribunal erred in law and in its evaluation of the evidence, leading to a wrongful affirmation of URA’s VAT assessment against the Appellant.
Ramification
This decision emphasizes a major position in Uganda’s tax jurisprudence by affirming that subscription and membership fees paid to non-profit, leisure or recreational clubs and associations are not inherently subject to VAT. It further signifies that as long as these nonprofit making entities do not provide services in the course of their business activities for profit, and no direct quid pro quo exists between membership fees and specific services rendered, VAT does not apply.
The court explicitly recognized that hobby, leisure, and recreational activities offered by such nonprofit entities fall outside the scope of taxable business activity. As a result, membership fees now paid to such entities are clearly characterized as contributions for access to membership rights, and not payments for taxable services.
It was most importantly noted by the Court that Kampala Club has been in existence since 1912 and for all that time, it has been collecting membership and subscription fees from its members without the tax body charging Value Added Tax on the same. Therefore, it was unjustifiable for the tax body to wake up in 2020 and seek to start charging Value Added Tax on membership and subscription fees paid to a non-profit organization.
This was a long awaited legal certainty for a wide range of non-profit organizations, member-based associations, and recreational clubs that were previously at risk of arbitrary VAT assessments by the Uganda Revenue Authority.
Conclusion
This case stands as a locus classicus on the VAT treatment of membership fees paid to non-profit organizations. It marks a significant legal development by establishing a legal benchmark for interpreting the applicability of VAT to member-based non-profit entities, protects non-profit and recreational clubs from arbitrary VAT assessments where no clear taxable supply or commercial activity exists, It clarifies legal uncertainty and prior case law inapplicability, it rejects broad interpretations of “taxable supply” that fail to distinguish between membership rights and offered services, it reinforces the principle that not all payments are “consideration” under VAT Act especially in the context of non-profit entities providing recreational, social, or leisure services, and it influences future legislative reform, URA tax policy, and guides future decisions of the Tax Appeals Tribunal.
By addressing whether subscription and membership fees paid to non-profit member clubs constitute a taxable supply under the VAT Act, this decision provides authoritative legal clarity, draws on comparative jurisprudence, and provides wide-reaching implications for similar entities, tax administration practices, and future policy formulation.
Editorial Team
