Health club operator Esporta has won its legal case to make payment arrears recovered from members to be free of VAT.

In a hearing put before the First Tier Tax Tribunal, the operator successfully argued that the sums recovered by the debt collection solicitors did not represent payment for any service supplied by the club.

The decision could potentially result in windfalls for clubs around the country as the tribunal's findings mean that health clubs are now - in principle - able to reclaim the amounts paid as output VAT on late payments.

Esporta has already indicated that it will be reclaiming the VAT paid on all late payments.

Commenting the ruling to Leisure Opportunities, David Stalker, chief executive of the Fitness Industry Association (FIA), said: "This landmark ruling is great news for any business, not just health and fitness operators, which opts for a membership and/or subscriptions based revenue model.

"Irrespective of the economic climate, any breach of contract should not be subject to VAT therefore, given the huge financial pressures on businesses at present, this ruling will help alleviate some of the tax burden and help business owners and managers optimise their financial and operational models.

It is likely that HMRC will appeal the decision.