Leisure agency models explained

What leisure agency model is the most efficient? Local authorities that run their own leisure facilities have, since March 2023, had some very good news from Government, confirming that leisure services are not subject to VAT.

Up until that point the running of leisure services was regarded as a business activity and subject to VAT. Local authorities were forced to treat in-house leisure provision as a business activity for VAT purposes and to charge their customers VAT at the standard rate or apply the exemption.

Three local authorities challenged HMRC to successfully secure this position, whereby the courts found that local authority leisure services were provided under their statutory framework and could be treated as non-business activity for VAT purposes.

The relevant cases are:

Midlothian Council v HMRC [2020] UKFTT 433 (TC)
Mid-Ulster District Council v HMRC [2020] UKFTT 434 (TC)
HMRC v Mid-Ulster District Council [2022] UKUT 00197 (TCC)
HMRC v Chelmsford City Council [2022] UKUT 00149 (TCC)

As a result of that ruling, the Government published a policy paper on the 3rd March 2023, ‘Changes to VAT treatment of local authority leisure services‘.

That paper states the following:

Before a public body, such as a local authority, can treat a supply as non-business it must be shown that this treatment would not significantly affect competition.

HMRC has conducted a detailed analysis of the leisure services sector. We have found that allowing local authorities to treat their supplies of leisure services as non-business would not significantly affect competition.

The Government went on to further state that local authorities can submit claims to HMRC for overpaid output tax, backdated to four years.

It is important to note that other income received by local authorities is not affected by this change, for example, car parking, food and beverage, vending machine purchases, merchandising, sporting lets and other sporting activities which were previously treated as exempt. The paper provides a link on how to correct that errors and make adjustments for claims.

Impact on local authorities

So what does this mean for local authorities that run their own leisure services? Those authorities can gratefully accept the windfall in backdated claims for VAT overpayment and reap the rewards for their leisure service going forward. Some or all of that windfall can be reinvested into leisure services and potentially the price that customers pay for such services. Following the coronavirus pandemic, authorities may choose to utilise that money to help fill gaps in their budgets, when forced to subsidise such leisure services during forced closures, and the slow return to usage by customers. Alternatively, authorities can look to targeted campaigns with health partners to help customers and constituents with symptoms of long-Covid return to health, fitness and mental well-being.

For local authorities that have outsourced leisure services, or have started new procurements to outsource leisure services, what we are seeing is that on reprocurement or variation of such contracts, sophisticated operators have now adapted their structures to provide an alternative way of servicing customers to move to this more tax efficient model. Most have agency-style arrangements for certain elements of the delivery of leisure services, with other elements of such services being delivered as principal; this is to support authorities in retaining the VAT benefit and not paying the operator for its irrecoverable VAT.

Take note

Clearly, care needs to be taken here that the authority is not actually just contracting with itself, and ensures that the operator is taking on real risk and standing behind its own business case.

Next steps

So what will that now mean for leisure services going forward? In our view, there will still be local authority leisure procurement. A number of operators specialise in this business and provide a genuinely excellent service to customers, taking on real business risks and effectively partnering with local authorities in doing so. As a result, there is likely to still be a need for such contractual partnerships. However what we are invariably seeing now, is a move to this mixed agency and principal structure, where operators and authorities are seeking to lock in more value through such tax efficient models, hopefully for the benefit of customers. Certainly, well-structured arrangements will in addition to this, continue to capture optimum risk transfer to operators and ensure delivery of a robust business case for the local authority.

How can Blake Morgan help?

Blake Morgan has vast expertise in leisure procurements. We offer a free initial conversation on leisure procurement and utilising the Sport England leisure template contract. The contract can be adapted to fit most different types of leisure procurements, to include varying degree of capital expenditure investment, planned inclusion or removal of facilities, joint-use arrangements, an allowance for pandemics and for different utilities and insurance solutions.

Our local authority leisure specialists can advise on how to make the most of the VAT ruling, allowing leisure services to have increased monies available for service provision. Speak to one of our experts about this or to see how we can help with regards to leisure services.

This article was originally published in November 2024 and last updated 13 March 2025.