Fitness First in dispute with members over VAT

The health club is applying the tax to the 2018 portion of any contracts already paid for in 2017 but other clubs are absorbing the cost themselves

Some members have been denied entry to Fitness First until they pay VAT. Photo: Fitness First

Members of Fitness First Middle East are embroiled in a row with the health club over VAT being applied to memberships signed and paid for last year.

Many Fitness First members have complained to the authorities over demands from the company to pay the tax for the 2018 portion of their membership; however, the company maintains it has complied with regulations as VAT is a tax on consumption of products or services, and not on businesses.

The health club said it has offered its customers a free one month subscription valued at Dh799 as a gesture of goodwill to offset the effect of the tax.

“It is very frustrating,” said Mehr Dumont, a housewife from Canada, who uses the Fitness First gyms in the Mirdif area of Dubai.

“In the contract I signed last year, there is no stipulation for VAT to be added.”

Some members complain of being denied entry to the club until the tax is paid. When they challenged the company they were told Fitness First could charge VAT as contracts state the management reserves the right to revise charges or fees at any time.

In a letter emailed to members, Fitness First Middle East said from January 1 any goods and services paid for but not utilised “will incur VAT”.

“This means if you purchased any services prior to January 1, 2018 and the same has remained proportionately unutilised, then from January 1, 2018 onwards you will be required to pay 5 per cent VAT on the unutilised portion of those services on a pro rata basis,” the letter said, adding this applied to all goods and services such as membership, personal training, classes and supplements and proteins.

However VAT experts told The National that health clubs should not apply VAT retrospectively.

Lisa Martin, a chartered accountant and founder of the accounting, auditing and VAT consultancy, The Counting House, said under the Transitional Provisions of Decree Law and Executive Regulations of the Decree Law there is no provision for Fitness First to charge its customers VAT on an annual subscription paid for in 2017.

“The law is very clear that unless Fitness First explicitly stated in the T&Cs at the time of renewal that VAT would be payable by the customer, then under the VAT legislation they cannot now charge it to the customer as an additional cost," she said. "This is just for the period of introduction of VAT, what is called the transitional period, and any new memberships taken out in 2018 will be subject to 5 per cent VAT.”

Jeremy Cape, a tax lawyer at Squire Patton Boggs, which has offices in London and the UAE, said Fitness First would struggle “to pass on the VAT cost to their customers who prepaid their gym membership in the absence of an explicit 'plus VAT' clause”.

“Even if there is a 'plus VAT' clause, I’m not convinced that it would enable them to pass on the VAT now - it would need to be very clear that the price could be increased retrospectively,” he said, adding that he did not believe it was the intention of the drafters of the legislation to impose VAT in these circumstances.

“There is a technical argument that VAT under the existing legislation doesn’t arise in these circumstances. If Fitness First (and other suppliers in a similar position) make this argument to the FTA, I’d be hopeful that the FTA would confirm that VAT doesn’t arise, or that the law would be changed to ensure that this is the position.”

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Ms Dumont signed her contract in February last year, receiving a free month as an incentive for the Dh4,200 renewal, which would see her membership expire on March 9.

However, she has so far refused to pay the Dh44 VAT demanded by the club for the 2018 portion of her membership, and says the club has told her they cannot honour her free month unless she pays the tax.

“Even though my contract says it expires on March 9, they have said they won’t honour that final month if I don’t pay VAT. I know plenty of other people are equally infuriated but they just didn’t have the time or patience to fight Fitness First and have ended up paying the VAT. “

Ms Dumont has lodged a complaint with the the Dubai Economic Department's (DED) Consumer Protection division and is waiting to hear back.

Another member to file a complaint with the DED is Sabine Dodiemont, who says she found out she had to pay VAT when her entry was blocked at the Ibn Battuta branch of Fitness First.

“When I signed the contract last year, there was no mention of the tax; I only knew I had to pay when they locked my entry card so that I could not get in,” said Ms Dodiemont, who works in finance, and signed up for her membership in March last year paying about Dh4,000.

“My tax invoice is for Dh57, which is nothing, but it’s not about the price, it’s the principle and the fact that they locked my card to make me pay the tax.”

Ms Dodiemont has now paid the tax to ensure she can enter the club but she still feels the situation is unfair.

“I’ve lived in Europe and I work in finance and I’ve done many VAT tax returns for many years and never had a case like this,” she said, adding that the DED has informed her she should pay the tax.

Ms Martin said it appears Fitness First is using another clause in its terms and conditions to increase the prices by the amount of VAT due.

"This clause states: 'Fitness First reserves the right to introduce and vary the prices and categories of membership from time to time.  All fees, including membership classes, personal training coaching and guest fees are subject to change at any given time'.

“So whilst legally they cannot charge the customer the VAT, it seems they do have the option to increase the price of an already fully paid annual membership, and are using this additional revenue to satisfy their VAT payable obligations.”

Other health clubs in the UAE are not collecting VAT on memberships paid for in 2017.

A spokeswoman for Gold's Gym said: "Our Policy on VAT collection for health club membership is that we will not collect VAT on any transaction carried out prior to January 2018."

FitRepublik, a gym in Dubai Sports City, issued an offer to its members in December saying: "Renew now and skip the VAT!"

Member Graham Parkin, a teacher from the UK, who paid Dh4,800 for a new membership at FitRepublik in December said: "I received an email alerting me that 5 per cent VAT would apply from January 1 so I signed up on December 21 to save on the VAT."

Real Pilates Dubai revised its initial decision to charge VAT on 2018 sessions paid for in Dubai. A text message sent to customers said: "Based on new clarifying advice from VAT consultants, we will now bear the cost."

Fitness First said any membership contracts issued this year, as well as after the issuance of the decree in 2017, mention VAT and the club's intention to apply the tax; however, contracts issued in the pre-decree period contained the clause: "Management reserves the right to periodically review their prices, charges and fees and implement these accordingly."

A spokesman said: "VAT is a tax on consumption of products or services, to be recovered from the end consumer. It is not a tax on business activity or income. We shared our approach with Dubai Economic Department towards the end December 2017, wherein our tax consultants took them through the law and laid out the company’s stand.

"We have never denied access to club members; however, the access gates do not open instantly for members who are in arrears. After a polite reminder, we allow the members to use the services."