We talk to the managing director of leisure consultants Max Associates about how the recent VAT changes to leisure services will affect the delivery of local authority leisure.
Changes to VAT for local authority leisure came into effect this March after Mid-Lothian Council, Mid-Ulster District Council and Chelmsford City Council went to court to challenge HMRC about the tax status of their leisure services. Prior to this, 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. However, as a result of the court ruling, these services are now classified as non-business supplies for VAT purposes, meaning local authorities which manage leisure centres in-house pay no VAT on their income. The transfer of VAT payments are automatic, resulting in an immediate financial uplift for local authorities, who can also make a one-off refund claim for VAT they have previously paid to HMRC. Traditionally, VAT reclaims can only date back four years but there may be exceptions, with some councils submitting claims that date back longer. “This is welcome news for many local authorities struggling to manage the escalating operating costs of leisure services due to increasing energy costs. 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,” explains Lisa Forsyth, managing director at leisure management consultancy Max Associates.
in-house vs contracting out The company has supported local authorities and councils to optimise leisure services management for more than 20 years. Since the VAT changes, it has seen an increase in the number of councils considering bringing their leisure service in-house. “The question of changing delivery models particularly arises in devolved council areas, or councils which have merged from a number of smaller district councils. Where this has happened there is often a range of operating model across the new area. We have been undertaking reviews in Bournemouth, Christchurch and Poole and North Northamptonshire which have a mix of in-house, local trust and external operator models.” Councils which have set up local trusts or trading companies may also decide it’s politically more desirable to bring services back in-house, as the financial governance benefits of the former models have been eroded. But where services have been outsourced to a larger external operator, apart from political preference, there is little evidence of councils changing the model ‘en masse’, says Forsyth. However, there are some local authorities bringing their leisure services in-house, particularly in London. Recent examples include Southwark, which launched its new in-house service in June 2023, and Lambeth which launched its Active Lambeth service in April 2023. Tower Hamlets has also chosen to do so, and its service is due to mobilise in 2024. “These decisions were taken before the new VAT treatment and were driven by the councils’ preference for in-house services and greater direct control over their operational delivery. However, the VAT changes are likely to add further weight to councils who prefer in-sourcing,” says Forsyth. She believes councils which prefer to transfer commercial risk to the market are likely to continue to use the contracted-out model, particularly where the service has been transferred out for a number of years and there is little operational skill and experience in council teams.
a balanced assessment Exciting as the VAT changes are, they shouldn’t be the sole reason for bringing leisure services in-house; there are a number of other considerations councils should also assess. “For example, larger external contractors have 20 plus years’ operating in the market. They have built good relationships with core suppliers and developed in-house services such as fitness, front of house systems and CRM suppliers. They will also have fostered relationships with NGBs to deliver programmes like This Girl Can and GP/cardiac referral schemes. That’s not to say councils (or local authority trading companies) can’t directly do this, but they shouldn’t underestimate the time and resource it takes to do so,” says Forsyth. It's important to remember that local authority leisure competes in the open market, whether that’s the budget gym sector, local cinema, 10-pin bowling complex or simply Netflix and PlayStation. “Services therefore need to have strong, agile and targeted marketing, comms and social media channels, be data driven and have a robust digital offer. Local authorities need to be fully aware of this and ensure back office systems are in place to support service delivery.” Staffing costs are another consideration. Council salaries are generally more attractive than in the private sector due to nationally agreed pay awards, alignment to existing council pay bands and eligibility to local government pension schemes. “This is great for staff working in a sector of historic low pay, but with staff costs being one of the largest costs to the service, it can lead to a significant increase in total expenditure, which could start to erode the VAT benefits.”
funding an evolving service The changes in VAT have reignited the discussion around the most suitable delivery model for local authority leisure services. But councils need to be able to answer a host of other questions before they can determine the appropriate operating model, says Forsyth. “When councils are reviewing their leisure services, they first have to understand the purpose/role of their leisure services, the measurable outcomes they are trying to achieve, how well the current service is delivering for their communities, the financial parameters they are operating in, the level of risk they are comfortable accepting and the skills and experience they have in-house. It’s not until councils can answer these key questions, that they should start to consider the delivery model.” Forsyth believes the culture of an organisation is always more important than its governance structure. “We’ve seen great in-house teams delivering innovative, commercial centres and facilities, while achieving significant outcomes for residents. But we have also seen services where there is silo working, a focus on reducing expenditure and little innovation or investment.” For Forsyth, the more pressing question is how centres will be funded going forward. “Prior to Covid, Sport England highlighted the capital cost required to invest in the ageing stock of swimming pools and leisure centres, and since then we have experienced significant increases in staff and utility costs. At the same time, the sector is taking steps to transition to an ‘active wellness service’ and align itself to delivery of health outcomes. “But until the service is genuinely seen as a health promotion service with cross department support, rather than being a community service with the Department of Levelling Up, Housing and Communities, the issue of funding the bricks and mortar of swimming pools and local leisure centres will remain with local authorities and reducing costs will be a driving factor.”
About Lisa Forsyth Lisa has worked in the local authority leisure industry for over 20 years. Starting out at an operational level managing local authority leisure centres, she went on to head up the business development department of one of the leading local authority leisure contractors in the UK. Lisa joined Max Associates as a consultant in 2008 and is now managing director of the firm, which delivers both consultancy and project management across the sport, leisure and cultural sectors. Lisa is a former member and board member (treasurer) of the Chartered Institute for the Management of Sport & Physical Activity (CIMSPA).
