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The business of leisure – the VAT treatment of local authority supplies

01 June 2023
A recent change in HM Revenue & Customs' (HMRC) guidance (following a number of Tribunal decisions) has implications for how local authorities should consider their VAT obligations and liabilities.

Following a number of appeals by local authorities across the UK (including cases involving local authorities in England and Wales, Scotland and Northern Ireland), HMRC has changed its position on whether local authorities should treat the provision of leisure services as "non-business activity" for VAT purposes.

HMRC's updated guidance published on 3 March 2023 entitled 'Changes to VAT treatment of local authority leisure services' is relevant to any local authority that provides leisure services (such as swimming pools and sports centres). However, alongside the cases that prompted it, HMRC's new guidance should inform the approach taken by local authorities more generally to the question of whether the activities they undertake involve making VATable supplies in the course of a business.

Why does this matter?

It is important for local authorities to determine whether or not they are carrying on a business (and making supplies) for VAT purposes. 

Not only are local authorities under regulatory (and sometimes contractual) obligations to charge VAT correctly, but whether or not local authorities are carrying on a business can affect their VAT recovery.

Local authorities need to be particularly cautious when making VAT exempt supplies as, broadly, if the proportion of their VAT incurred that is attributable to VAT exempt supplies exceeds 5%, this is likely to result in VAT recovery issues. This was a significant risk for a number of local authorities providing leisure services prior to HMRC's change of guidance as, unless these local authorities charged VAT (which HMRC considered that local authorities had the discretion to do in this specific context), HMRC considered that the leisure services supplied were VAT exempt.

Finally, due to the complexities of certain rules under which options to tax land and buildings for VAT can be automatically disapplied, when a local authority is involved in funding development projects for the local authority's use, the nature of the local authority's proposed use can have an effect on the VAT recovery of other parties involved in the development project, This can have an effect on a development project's viability.

The background to HMRC's updated guidance

The VAT legislation provides that goods and services supplied by a local authority "in the course of activities or transactions in which it is engaged as a public authority" are treated as not being provided in the course of a business (and so as not being supplies for VAT purposes), except in specified scenarios (like the provision of telecommunication services), or where not treating a local authority's activities as business activities would result in a "significant distortion of competition".

HMRC had previously indicated that the provision of leisure services by local authorities was a business activity on the basis that, in providing the leisure services, the local authorities were not "engaged as a public authority". As a result of a previous Tribunal decision, HMRC considered that local authorities had discretion as to whether they treated their supplies of leisure services as VATable or VAT exempt. However, local authorities from different jurisdictions within the UK sought to treat such leisure services as non-business activities such that they could recover input VAT in relation to such services, without charging VAT to their customers. When HMRC disagreed with this approach, the local authorities appealed to the Tax Tribunal.

The relevant decisions

The Tribunal determined (in a number of related cases including decisions of the First-tier Tribunal and Upper Tribunal) that, in order for a local authority to be "engaged as a public authority" in carrying out an activity (so as to make that activity a non-business activity), the local authority must be engaged in the activity under a "special legal regime" and not under the same conditions that apply to normal businesses.

The Tribunal went onto determine that the regimes under which local authorities generally provide leisure services were special legal regimes, such that a local authority's provision of leisure services should be treated as a non-business activity (which does not give rise to VATable supplies, but permits local authorities to recover input VAT).

Importantly, the Tribunal (at least in one of the decided cases) held that a "special legal regime" included activities undertaken pursuant to specific local authority powers, exercised in the context of general local authority duties, for the purposes of achieving objectives benefitting the local authority's area of responsibility. While the Tribunal made clear that a "special legal regime" did not include actions engaged in by local authorities merely under generic local authority powers, the Tribunal's approach could still result in numerous services supplied by local authorities being treated as "non-business" depending on the particular legislative context in which those services are carried out.

The Tribunal also held that the subject matter of the local authority's activities were irrelevant in determining whether they should be treated as business activities. What mattered was whether such activities were performed under a "special legal regime".

HMRC's New Guidance

HMRC's updated guidance published following the Tribunal decisions discussed above is short and only addresses the provision of leisure services by local authorities. It accepts that the provision of leisure services by local authorities should be treated as a non-business activity and confirms that HMRC does not see such provision of leisure services as significantly affecting competition. It then provides details as to how local authorities can reclaim any VAT overpaid (or underclaimed) as a result of having following HMRC's previous approach. 

While HMRC's updated guidance is careful to state that: "Any other income received by a local authority is not affected by this change", the relevant Tribunal decisions lend themselves to a wider potential application than just leisure services.


The first point to note is that local authorities should review their VAT treatment of leisure services in light of HMRC's updated guidance and consider whether to submit claims for VAT repayments. Where local authorities have previously submitted VAT repayment claims to HMRC in respect of leisure services provided by that local authority, they will need to review their claims and may need to resubmit them with additional supporting evidence. 

However, in light of the Tribunal's conclusion that the subject matter of a local authority's activities are irrelevant in determining whether they should be treated as business activities, we consider that the policy and decided cases underpinning HMRC's updated guidance should be considered outside of the context of the provision of leisure services. 

Therefore, local authorities should consider whether there are any other goods or services that they provide under specific statutory powers or duties, which they are required to perform in a different way or manner from normal business. Depending on the precise statutory context in which these duties are carried out, there may be a basis for treating such activities as non-business for VAT purposes.

Finally, local authorities may also want to review those services (particularly leisure services) outsourced to third-party private operators, or performed by entities controlled by the local authority, and consider whether there could be any VAT benefit to the local authority performing these services itself (although whether this would be an appropriate course of action would also depend on other commercial, legal and tax considerations). 

If you would like to discuss any consequences of the matters discussed in this article, please do not hesitate to contact Colin Murray, Alex Tolcher or John Toon. Alternatively, you can always speak to your regular DWF contact. 

Further Reading