Councils in the UK will benefit from hundreds of thousands of pounds of extra revenue due to a change in VAT legislation.

Prior to March 2023, local authorities managing in-house leisure facilities were required to treat income from services such as gym memberships as business activities and pay VAT to HMRC on takings.

Now, a revised treatment of VAT states these services are classified as 'non-business' supplies for VAT purposes.

The change means local authorities pay no VAT on their income and can also reclaim all the VAT they incur on the related costs (revenue and capital) unconditionally.

Tax expert Nick Burrows, director at PSTax, told HCM: "This is a rare case of an unqualified VAT win for local authorities. 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."

The change in the treatment of VAT is the result of challenges made by three local authorities (Midlothian Council, Mid-Ulster District Council and Chelmsford City Council) dating back to 2020, which led to consideration by the courts.

This litigation has now concluded and the courts have found that local authority leisure services are provided under a statutory framework, leading to this reclassification.

"Local authorities can also make a one-off refund claim for VAT they’ve previously paid to HMRC", says Burrows.

"This is because the court’s judgment means it was always the case that local authority leisure provision was non-business for VAT.

"Four-year historical claims are normally as far back as you can go with VAT, but some councils put in claims years ago, anticipating this new judgment and so we know of examples where councils are claiming for as many as seven years’ VAT," he explained.

Lisa Forsyth, director at leisure consultancy, Max Associates, said: “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.

“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.

Forsyth believes the change will alter the local authority contracting landscape, saying: "When management contracts come up for renewal, we're likely to see more local authorities seeking advice on VAT and other tax and legal aspects before deciding on the future management of these services."

Forsyth added that several councils have already benefitted from the change and that it could lead to changes in the way local authorities deliver their leisure services – especially when it comes to outsourcing management services.

“Some may look at this as another reason to bring services back in house," she said."A balanced assessment should always be made.

"Where local authorities fully understand the outcomes they need the service to achieve, the financial parameters they're working within, their own capacity and skill set, they can then determine the most suitable delivery model for their leisure services.”

Read our profile of Nick Burrows from PSTax in the upcoming issue of HCM. Sign up herefor your free digital edition.