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Sports Clubs: HMRC Status

Volume 605: debated on Tuesday 9 February 2016

I beg to move,

That this House has considered multi-sports clubs and HMRC changes to community amateur sports club status.

It is a pleasure to serve under you, Mr Bone. In many ways the context of the debate is the rather disappointing Olympic legacy, with participation reducing in sports. In the past four years, the number of people doing more than half an hour of sports a week has declined from 25 million to 23 million; and as has been widely reported, obesity has increased by something like two thirds since 1993. In the context of joined-up government, it is therefore somewhat surprising that the Government have chosen to increase taxes on a number of amateur sports clubs, which will almost certainly lead to some detrimental impact on participation.

I will use Warrington sports club as my example, but I could have used many others. In particular, I have been contacted by a large number of golf clubs that are also being hit by the tax changes that Her Majesty’s Revenue and Customs is in the process of bringing in, which will have an impact on participation. Warrington sports club has 750 members, of whom 400 are junior members. That high ratio of junior members is one of the factors that has led it to fall foul of HMRC. Another factor is that it is a multi-sports club that does six major sports: rugby, cricket, hockey, squash, tennis and archery. The club was founded in 1852, so it has been going for a long time. It costs £220 a year for a multi-membership and £130 for a single membership, so it is not a major, lucrative money-making venture. The two issues that have taken the club the wrong side of the legislation are that it is a multi-sports club and that it has a relatively high number of junior members.

In terms of the club’s financials, membership brings in something like £50,000 a year and the bar brings in £290,000 a year of which £140,000 a year is from non-members. Non-member income is the issue that the Revenue is trying to address. One of the reasons for the large non-member income is that the club has a significant number of junior members, so parents take juniors to play rugby, cricket, hockey and whatever and have a drink while their offspring are playing. That counts as non-member income, which is the crux of the HMRC requirements. In terms of profit and loss, in the past two years on a turnover of about £300,000 a year the club has made a total profit of just under £2,000. The club is run to break even; it is not a profit-making club.

The legislation from which the club and many others have benefited was introduced in 2002 to attempt to increase participation in sport by making concessions for amateur sports clubs. The concessions were an 80% relief on rates, some corporation tax relief and gift aid status if they registered to be a community amateur sports club. Something like 6,000 sports clubs registered as CASCs. The valuable part of that concession for Warrington is that it saves about £14,000 a year in business rates, which may not be huge in terms of its turnover, but that is a reasonable chunk for a club that broadly breaks even. It comes to something like £20 a member, which is about 15% of the membership fee.

The legislation brought in by the Government in 2002 had numerous sensible criteria. The club had to be open to the whole community—it could not be a private, restricted club—it had to be amateur and its main purpose had to be the promotion and participation of an eligible sport. Clearly that was the case for Warrington and up until now that has worked fairly harmoniously.

In 2013, HMRC started a consultation. Its concern was apparently that the existing legislation was complex and confusing. There was clearly potential that organisations that are not really sports clubs whose primary purpose is not sport could register for CASC and take the benefits, which would not be fair to aspects of the hospitality industry. I can see that and the people at Warrington sports club can see that. If abuse was taking place, it is reasonable that HMRC should look at how it might wish to stop that. That seems to me an easier loophole to close than some of the other issues it grapples with on our behalf, such as double Irish, Facebook, Google and all that goes with that, but the focus in 2013 was amateur sports clubs.

HMRC sent out a consultation with a number of options and I think it would be fair to say—I am sure the Minister will agree—that it was trying to develop quantitative criteria by which it could judge whether an entity should be CASC-registered. It would not be a judgment on whether something was a sports club; HMRC could say, “It is a sports club because of these quantitative criteria, so we can tick a box. This one clearly passes and that one doesn’t.” One can only imagine that it was trying to remove uncertainty and dialogue, with people arguing, “His club should be if mine is” and vice versa.

At the time of that consultation, there was no mention whatever of state aid being one of the drivers of what HMRC was trying to do. At no point was the reason given that there was concern that some sports clubs might have an issue with state aid, but I say that because recent correspondence with HMRC has given that as the reason for not changing some limits. The consultation ran its course and at the end HMRC decided to impose two quantitative criteria. One was a £100,000 a year maximum on non-member income. As I said, the club had £140,000 non-member income, which put it outside that limit. One reason why the club is outside the limit—this is why the debate is about multi-sports clubs—is that the club runs six sports, so it is a relatively big club. If it were six separate clubs, they would be beneath the limit, but that structure would be onerous to go to and difficult to achieve. The £100,000 limit discriminates against multi-sports clubs.

The other quantitative criterion that HMRC imposed was that 50% of members had to participate actively in a sport. I guess the reason for that is that it wants to ensure that CASCs are real sports clubs and that people are not joining just to enjoy the benefits of the £14,000 a year that the club enjoys. That has caused Warrington an issue, because roughly speaking—it is only an estimate—its non-member income is about £140,000 because it is a multiple sports club. The other point is that because it has a large junior membership—400 of the 750 members are juniors, which I would submit is a good thing—parents will sometimes join the club socially or whatever. Those who have to take their children to the club will have a drink. They may or may not be members. If they are members, they may not do sport 12 times a year, so they would fall outside that criterion. In any event, the criterion appears to be a complex one, with 16 measurements for participation.

The impact on the club is £16,000 a year. I do not suppose that that will close it. It is a material issue, but it will not break it. HMRC tells the club that if it wants to it can set up a trading subsidiary. That would involve accountants and lawyers, and all the rest of it. Obviously, the bar income would go into the trading subsidiary. The estimated cost would be several thousand pounds, and the trading subsidiary would pay corporation tax. Perhaps that is what the Revenue wants, but it is quite onerous, and it is unclear what the saving would be. The other possibility would be to split the sports club into six separate sport clubs—one for each sport. There would clearly need to be a method of checking which club people who bought drinks were in, and so on, because of the de minimis limit. The consequence would probably be something like a 20% increase in membership fees—£25 a year. Presumably, because everything in economics happens at the margin, that would cause a reduction in participation, which is not really what the Government want.

The club put a request to HMRC. It said, “Okay, we kind of understand the direction of what you are trying to do. We understand the abuse that you are trying to tighten up on, and the clarity that you want. Let’s change the £100,000 de minimis thing, given that this is a multi-sports club, to £150,000.” Obviously there is self-interest there, because the Warrington club would be under that, and would save £14,000. We got the answer from HMRC that—I paraphrase—it would be happy to help, but its hands are tied by state aid rules. That is the first mention we have had of state aid rules, and no one would think that Warrington sports club was the first entity to create a state aid issue for the Government—a Government, by the way, while we are on the subject of state aid, who have difficulty in stopping the German Government reducing electricity prices for their heavy industry by a factor of two, so that their steel companies do not close while ours do. Nevertheless, Warrington sports club was informed that HMRC could not help and that £100,000 was the highest the figure could be, because of state aid rules.

I have good news for the Minister, however, because in the past few days I have read the Department for Business, Innovation and Skills state aid manual, which came out in July 2015. It is a rattling good yarn, and explains that there is a de minimis limit on state aid of €200,000 over a three-year period. In the view of BIS that would not distort competition in the European market. We thought we were home and dry, because obviously the £14,000 or €20,000 that Warrington sports club and other sports clubs enjoy is clearly a factor of three or four below that state aid amount. It would appear to me from the BIS manual that we have found a way out for HMRC. It will no longer have to be concerned about being dragged through the European Court on matters of state aid and the rest, because of the de minimis limit and its impact on Warrington sports club. I am informing HMRC of that point in this debate, and I look forward to the Minister’s response.

I have five questions for the Minister. Why does the correspondence that we have received from HMRC—most recently the Lin Homer letter of November 2015—rest its case on state aid, when state aid was not mentioned at all in the initial consultation? Given that we now have the BIS state aid manual and know that there are minimum state aid thresholds, can we incorporate what we know into HMRC policy? Presumably the handbook applies to HMRC. In the opinion of the Minister, have the changes to the entire area that have taken place in the past three years, which will raise very small amounts of tax, if any, increased or decreased complexity? Does the Minister have an estimate of the number of clubs that are deregistering, and has there been any discussion with DCMS of the decline in sports participation that will be a consequence of that? Does he agree with me that instead of engaging in a drive to find a quantitative criterion for evaluating clubs it should have been possible, given all the value judgments that HMRC inspectors must make, to tell whether x or y is a sports club? That would not be beyond HMRC; it is something that could have been left to the judgment of tax officers.

It is a pleasure to see you in the Chair, Mr Bone, and to have the opportunity to respond to my hon. Friend the Member for Warrington South (David Mowat) in this important debate. I commend and congratulate him on bringing it to Westminster Hall.

Successive Governments have recognised the benefits of sporting activity in improving people’s health and wellbeing, and in strengthening community cohesion. I welcome the opportunity to express the Government’s continued support for community amateur sports clubs, which, among other things, play an important part in consolidating our Olympic legacy, as my hon. Friend mentioned. It is right that the Government should use the tax system, as well as other forms of support, to encourage the benefits offered by those clubs.

There are about 7,115 community amateur sports clubs, and they certainly deserve the Government’s backing. The new regulations for CASCs continue to ensure that support through the tax system is correctly targeted at them. The community amateur sports club tax scheme provides a number of vital charitable tax reliefs to support local amateur sports clubs. Following a detailed review by HMRC of how the scheme was operating under the old rules, which showed that they were confusing and difficult to understand, the new CASC regulations came into effect on 1 April 2015. They included, as my hon. Friend said, a new income ceiling of £100,000 for non-member income.

Extensive consultation took place before the new rules were formulated. The Government formally consulted on outline proposals for reform of the scheme in June 2013 and published their response that November. Between November 2013 and September 2014 officials were engaged in regular and intensive dialogue with representative bodies individually, as well as establishing a forum for representatives of the sports sector.

The forum has a membership drawn from several sports’ national governing bodies and representative organisations. It met regularly during development of the new policy and the drafting of the new regulations. Particular issues of interest to members were aired at the forum and more detailed working group meetings ensured that HMRC understood specific issues for different sports as it developed the rules. As a result, changes were put in place to address the genuine concerns of some members of the forum, and the draft regulations were amended to increase the generosity of the social membership rule. Throughout the consultation process HMRC worked closely with officials from the Department for Culture, Media and Sport and its agency, Sport England.

The new regulations have made the scheme more generous than it was, which makes membership more attractive. However, the scheme works by providing tax advantages only to those that need them, and it is of course important that taxpayers’ money should be spent wisely. To take an extreme contrast as an example, clearly a youth football club with a tuck shop should get the tax advantages, but a pub with a darts team should not. That said, the new rules were developed to enable as many clubs as possible to remain within the scheme. Eighty-five per cent of existing CASCs are not affected by the new rules, as they operate fully within both the old and new rules.

It is worth noting that HMRC has not received evidence that the rules significantly increased the administrative costs for clubs within the scheme. However, some clubs inevitably are disappointed that the rules are not more generous. HMRC has continued to give help and guidance to clubs to help them remain within the scheme, and the dedicated HMRC charities helpline remains available to CASCs. If my hon. Friend or the club in his constituency wish to have a further conversation, they can do so by calling the helpline on 0300 123 1073. I would also be happy to arrange for either him or representatives of Warrington sports club to meet with officials to discuss the situation.

Some clubs may decide that complying with the new regulations is not financially viable and decide to leave the scheme instead. While we will not know the numbers involved accurately until after the 12-month grace period expires on 1 April 2016, we know that clubs are applying for CASC status at approximately the same rate as in 2014-15, before the rules changed.

The main purpose of a CASC must be the promotion of sport by providing facilities for the whole community. Clubs that generate a disproportionate amount of their revenue from non-sporting activities may be primarily social or commercial clubs. If a club’s main purpose is not sporting, it is obviously not eligible to be a CASC. It is important that the generous tax reliefs available only go to genuine amateur sports clubs. The Government recognise that many sports clubs raise funds from social functions and other non-sporting activities to subsidise membership fees and consider that the £100,000 income threshold provides sufficient flexibility to do that.

The consultation document was clear that the tax reliefs afforded to CASCs are not meant to support clubs that could be seen as competing with other commercial businesses such as pubs and restaurants, as my hon. Friend said. A higher limit could increase the risk of a state aid challenge because clubs could be seen to be engaging in economic activity. I must make it clear that in the event of a successful state aid challenge, HMRC would have no alternative but to seek to recover what would then be deemed underpaid tax from each club—a situation that all of us would want to avoid. The stakes when considering any potential state aid challenge case are therefore really quite high.

When considering the state aid threshold of €200,000 over three years—my hon. Friend was right to raise this important point—the relevant rules require all forms of potential state aid provided to be taken into consideration. As well as the tax reliefs provided by the CASC regime, CASCs also benefit from lower business rates and may in addition receive grants or other forms of financial assistance. The amounts in question will vary from club to club. The income limit is set at a level that seeks to ensure the de minimis limits will not be breached once business rates and any other form of financial assistance are taken into consideration.

I reiterate that the main purpose of a CASC must continue to be the provision of facilities for an eligible sport or sports, and the encouragement of participation in those sports. If a club has a lot of non-sporting income, it is unlikely to be primarily a sports club. The new CASC regulations allow clubs to earn up to £100,000 a year from non-member trading and property income. There is no limit at all on the amount of income clubs can generate from members, apart from property income from members, which also counts towards the £100,000 cap.

During consultation, representations were made for a more flexible approach and perhaps a more bespoke income limit. However, that would greatly increase the complexity of the regime and regulations. Different rules for different sports or sizes of club would increase the administration for both clubs and HMRC, and that approach was rejected on these grounds.

If clubs that are already registered as CASCs have high levels of non-member trading income and/or property income and do not want to be deregistered, they may choose, as my hon. Friend said, to consider setting up a trading subsidiary in the same way as many charities have trading subsidiaries. This is important: any income generated by a trading subsidiary will not count towards the club’s income threshold.

Trading subsidiaries should be owned and controlled by the CASC, allowing the subsidiary to trade but not be entitled to CASC reliefs. However, the trading company may gift-aid its otherwise taxable profits to the CASC and not pay corporation tax. Similarly, separate supporters’ clubs may be set up to assist clubs with high levels of junior membership—another important point that my hon. Friend raised—in meeting new rules for participation levels where it is a requirement that a non-sporting parent or guardian is also a member.

HMRC cannot register clubs that do not meet the income condition. It expects all clubs affected to take steps to reduce their level of non-member trading and property income, and in many cases that will be by setting up a trading subsidiary. The new income condition provides a sound regulatory foundation for the CASC scheme going forward that is fair and in keeping with one of the founding principles of the scheme: to support small volunteer-run community amateur sports clubs.

I listened carefully to the Minister’s point on state aid. The fact that the de minimis limit applies to all forms of aid is, of course, reasonable. I make the point again, though, that my local club—I do not believe there is any reason to think Warrington sports club is atypical—would be under the current de minimis state aid limit by a factor of four or five. It is hard to see that the figure of £100,000 is, in fact, responsive to that de minimis state aid limit.

To actual aid, in all its forms. Officials had to, appropriately, make a judgment in designing a scheme that would apply across the sector on the safe level of non-member income, as a generally applicable rule that would keep clubs safely under that limit. The figure they arrived at for the limit was £100,000. In the particular case of my hon. Friend’s local club, which he rightly and ably represents today in Westminster Hall, I would be happy to arrange for further discussions on appropriate avenues forwards.

The vast majority of clubs currently in the scheme have been unaffected by the new income condition, and detailed guidance is available to them and to those considering joining the scheme in the future. That means the tax reliefs available under the CASC scheme continue to be a vital element in supporting small clubs within the scheme to deliver the benefits of participating in sport.

The new non-member income threshold continues to encourage and support community sports clubs. The Government believe the cap is set at an already generous level and strikes the correct balance between the interests of the CASCs to raise extra funds and the interests of local businesses. The scheme should not provide tax reliefs to clubs that derive significant amounts of income from non-member social and commercial activities, as that was not what it was designed for. I close by thanking my hon. Friend once again and commending him for bringing this important debate to the House.

Question put and agreed to.

Sitting suspended.