A proposed change to the way councils organise the operation of their leisure facilities – including gyms and health clubs – could see not-for-profit leisure trusts benefitting from up to £78 million of VAT savings a year across the UK.

The proposed changes, which would involve the creation of 'Agency Agreements' between trusts and councils, have been prompted by a successful legal challenge to VAT legislation which happened in March this year, when local authorities managing facilities in-house won a court ruling reclassifying facility visits as ‘non-business’’, meaning they no longer have to pay VAT on income and can reclaim VAT incurred on related costs.

The ruling was estimated to save councils millions and impact 20 per cent of leisure centres in the UK.

However, although the change represented a huge windfall for local authorities, it left not-for-profit trusts, such as GLL, stuck in middle ground, as they can already reclaim VAT on activity income, but still have to pay corresponding – and irrecoverable – VAT on expenditure.

Lisa Forsyth, MD at strategic consultancy, Max Associates, explains: “Initially, when HMRC announced VAT revisions back in March, the only beneficiaries were local authorities managing in-house leisure services.

“As a result, some trusts are developing an ‘Agency Agreement’ which could see them collecting income on behalf of the local authority as its ‘agent’. In this scenario, income remains ‘non-business’, meaning VAT on expenditure could be reclaimed by them as well.

“The impact for the sector could be huge,” she said. “Community Leisure UK (CLUK) estimates there are 780 not-for-profit trusts in this sector. If all were to benefit from a new agency agreement model, the financial benefit would be between £50,000 and £100,000 per facility, or £39 – £78 million per annum in total across the sector.

Max Associates is working with a team of VAT advisers at PSTax and local government specialists from law firm Trowers and Hamlins to consider the principles of how an agency agreement could be presented to satisfy HMRC and meet legal and procurement requirements.

The three organisations have published a briefing about the March changes to VAT and how a new agency agreement model might work for trusts. It can be downloaded here.

If successful, the introduction of agency agreements would further concern private sector health and fitness operators, who already believe they have been disadvantaged by the March ruling and would leave them as the only operators in the sector not to be benefitting from VAT breaks.

Following the March ruling, it was thought that private sector operators might appeal on the grounds of the decision being anti-competitive, as this was one of the parameters considered by the courts, however, no case has yet been brought.

HMRC is thought to be reconsidering the scope of the March VAT treatment ruling and in a pre-emptive move to avoid a legal challenge from commercial providers, is considering imposing conditions on local authorities wanting to adopt the protocol, so the matter is clearly far from resolved.