WeightWatchers 2008 Annual Report Download - page 88

WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
High Court, in May 2007, and in January 2008 the High Court denied HMRC’s appeal in part and allowed
HMRC’s appeal in part. In April 2008, the Company filed an appeal to the Court of Appeal in part against the
High Court’s ruling and HMRC also filed an appeal to the Court of Appeal in part against the High Court’s
ruling. In June 2008, the Court of Appeal issued a ruling that Weight Watchers meeting fees in the United
Kingdom were fully subject to 17.5% VAT, thus reversing in its entirety the VAT Tribunal’s 2007 decision in
the Company’s favor. In July 2008, the Company sought permission from the U.K. House of Lords to appeal the
Court of Appeal’s ruling, which permission was denied in January 2009.
In light of the Court of Appeal’s ruling that Weight Watchers meeting fees in the United Kingdom were
fully subject to 17.5% VAT and in accordance with Statement of Financial Accounting Standards No. 5,
“Accounting for Contingencies” (“SFAS 5”), the Company recorded a charge of approximately $32,500 as an
offset to revenue in the second quarter of fiscal 2008 for U.K. VAT liability (including interest) in excess of
reserves previously recorded. Beginning in the third quarter of fiscal 2008, in accordance with SFAS 5, the
Company recorded as an offset to revenue VAT charges associated with U.K. meeting fees as earned, consistent
with the Court of Appeal’s ruling. These charges were approximately $1,800 with respect to the third quarter of
fiscal 2008 and approximately $1,400 with respect to the fourth quarter of fiscal 2008.
However, with respect to U.K. VAT owed for the period prior to July 1, 2005, HMRC has failed to raise a
notice of assessment within the statutory three-year time period. In addition, although HMRC raised notices of
assessment against the Company with respect to U.K. VAT due for the period July 1, 2005 to September 30,
2005 and for the period October 1, 2005 to December 31, 2005, the Company has asserted that these notices of
assessment are invalid and should not have been raised on the grounds that they had been raised outside the
relevant statutory time limits. HMRC indicated in November 2008 that it agreed with the Company’s assertion
that the notice of assessment for the period July 1, 2005 to September 30, 2005 was invalid, and, in February
2009, confirmed that this notice had been formally withdrawn. As a result of the expiration of the statutory time
period with respect to U.K. VAT owed prior to October 1, 2005, the Company recorded in the fourth quarter of
fiscal 2008 as a benefit to revenue for the periods prior to October 1, 2005 an amount of approximately $9,200 as
an offset against reserves previously recorded including in part the charge recorded against revenue in the second
quarter of fiscal 2008 for U.K. VAT liability. In addition, the Company intends to vigorously challenge as invalid
and outside the relevant statutory time limits any amount of U.K. VAT that HMRC claims to be owed by it for
the period October 1, 2005 to December 31, 2005.
U.K. Self-Employment Matter
In July 2007, HMRC issued to the Company notices of determination and decisions that, for the period April
2001 to April 2007, its leaders and certain other service providers should have been classified as employees for
tax purposes and, as such, it should have withheld tax from the leaders and certain other service providers
pursuant to the “Pay As You Earn,” or PAYE, and national insurance contributions, or NIC, collection rules and
remitted such amounts to HMRC. HMRC also issued a claim to the Company in October 2008 in respect of NIC
which corresponds to the prior notices of assessment with respect to PAYE previously raised by HMRC. As of
the end of fiscal 2008, the assessment associated with the notices of determination and decisions and the claim in
respect of NIC are approximately $23,400. It is the Company’s view that the U.K. leaders and other service
providers identified by HMRC in its notices and in its claim are self-employed and no withholding by us was
required. In September 2007, the Company appealed HMRC’s notices as to these classifications and against any
amount of PAYE and NIC liability claimed to be owed by it and, in July 2008, filed this appeal with the U.K.
Special Commissioners. In February 2009, the U.K. Special Commissioners provided notice that the Company’s
appeal will be heard in June 2009. The Company intends to vigorously pursue its appeal and, although there can
be no assurances, the Company believes, based in part upon advice of legal counsel, it will ultimately prevail in
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