Prior to March 2023, local authorities managing in-house leisure centres were required to treat services such as gym memberships and other facility visits as business activities for VAT purposes and pay VAT to HMRC from the income. Now, a revised treatment of VAT states these services are classified as non-business supplies for VAT purposes. This means local authorities pay no VAT on their income, as well as reclaiming all the VAT they incur on the related costs (revenue and capital) unconditionally.

“This is positive news for many local authorities. According to information supplied by The Leisure Database Company, currently more than 20 per cent of leisure facilities are owned and managed in-house by local authorities across the UK. Qualifying local authorities do not need to take any action, the transfer of VAT payments are automatic, resulting in an immediate financial uplift,” explains Lisa Forsyth, director of leisure management consultancy Max Associates.

“For many local authorities struggling to manage the escalating operating costs of leisure services due to increasing energy costs, this will be welcome news. It also gives non-charitable local authority owner/operators comparable advantage to their not-for-profits and charitable trust counterparts. As a result, when management contracts come up for renewal, we are likely to see more local authorities seeking advice on the VAT and other tax and legal aspects before deciding on the future management of these services.”

Max Associates has been advising several councils, which have mixed delivery models in their areas. For example, Bournemouth, Christchurch and Poole has recently been amalgamated and has a mix of in-house, local trust and external operator models. This change in the treatment of VAT is a significant contributing factor in the financial analysis of how to manage a united leisure portfolio moving forwards. Similar reviews are taking place across the South and East Lincolnshire Partnership,  Stroud, Gedling and North Northamptonshire.

“Over the last 30 years,  governance structures, economies of scale and commercial approach meant many local authorities favoured outsourcing leisure services to gain financial benefits, increased throughput and enabling investment into ageing facilities. In 2011, the Localism Act granted local authorities new powers to trade and we have seen a steady rise in the creation of LATCos (local authority trading companies), established to manage leisure services as a result,” says Forsyth.

Some may look at this as another reason to bring services back in house, but authorities need to consider their resources, impact on staffing and pension costs, ability to be agile in a competitive market, economies of scale they can achieve and how commercial the culture of their organisation is before making any decisions.

This is a rare case of an unqualified win for local authorities, says Nick Burrows, director of public sector tax advisor, PSTAX, which works closely with Mas Associates.

“Not only will most of their leisure centre income be VAT-free, but their VAT costs related to leisure services will still be fully recoverable. Also, local authorities can make a one-off refund claim for VAT they have paid to HMRC in the last four years.”