Millions in VAT payments could be returned after HMRC decides against appeal in dispute with councils over leisure services income

HM Revenue and Customs (HMRC) has invited local authorities to apply the non-business treatment to their supplies of leisure services following the conclusion of a decade-long legal dispute over whether councils should charge VAT to customers of their in-house sports and leisure facilities.

The decision could see HMRC return millions in VAT payments to local authorities.

In a policy brief entitled ''Changes to VAT treatment of local authority leisure services'', HMRC explained that the courts have found that local authorities' leisure services are provided under a statutory framework and can be treated as non-business for VAT purposes.

"Before a public body, such as a local authority, can treat a supply as non-business it must be shown that this treatment would not significantly affect competition.

"HMRC has conducted a detailed analysis of the leisure services sector. We have found that allowing local authorities to treat their supplies of leisure services as non-business would not significantly affect competition."

Local authorities can now apply the non-business treatment to their supplies of leisure services, and they can also submit claims to HMRC, the policy brief notes.

It adds: "If you've previously submitted a claim, you need to review and resubmit this with supporting evidence. This is to reduce the delay in authorising repayments."

"If you've made a claim for overpaid output tax, you must only include the VAT paid in relation to leisure services."

According to HMRC, any other income received by a local authority is not affected by this change.

HMRC had appealed the decision of the First Tier Tribunal in Chelmsford City Council v Commissioners for HM Revenue & Customs [2020] UKFTT 432 (TC), which concluded that Chelmsford's services were provided under a special legal regime and that, accordingly, the supplies did not bear VAT.

It later appealed that decision to the Upper Tribunal, but judges dismissed the appeal.

Sample cases were taken for England, Wales, Scotland and Northern Ireland after complaints from councils that HMRC had improperly charged them VAT on the services.

Chelmsford City Council launched the sample case for England and Wales, while a case from Mid Ulster District Council was selected as a sample for Northern Ireland. Scotland's representative case was Midlothian Council, which had claimed £1m.

The amount claimed in overpaid VAT from the three sample case councils amounted to £2.4m.

One of the local authorities involved in the dispute, Adur and Worthing Councils, announced on Tuesday (21 March) that it should now be able to reclaim the £2.5m it paid to HMRC in VAT between November 2007 and April 2015 as a result of the news.

The council outsourced its leisure services in 2015, meaning the HMRC case does not affect the period after this date.

Adur and Worthing added that the development would help the council shore up its finances after financial pressures left the local authority with just £680,000 in its reserves.

Cllr John Turley, Worthing's Cabinet Member for Resources, said: “This has been a long battle but the excellent work of our officers over the last 12 years has finally paid off.

“The surge in the cost of living and inflation has forced us to use much of our reserves over the last 12 months, which means we have little in the way of savings for any rainy days ahead.

“We need to put the lion's share of this refund from HMRC back into our reserves but we will also take a detailed look at our budgets to see if some should be invested for the benefit of the community now.”

An HMRC spokesperson said it accepted the decision of the Upper Tier Tribunal, adding that: “We are currently reviewing and repaying all agreed claims and will contact all customers with further details shortly.”

Adam Carey