Local Authority Leisure Facilities and VAT

The First Tier Tribunal has recently released some decisions which have potentially significant ramifications for councils charging for access to leisure facilities. Following the case of London Borough of Ealing, HMRC accepts that the sporting exemption can be applied to such charges, as is clarified in Revenue & Customs Brief 6 (2017). This meant that VAT did not have to be added to such charges but could impact on VAT recovery in relation to costs.

However, Mid Ulster District Council and Chelmsford City Council have recently successfully argued at the First Tier Tribunal that such charges are outside the scope of VAT. Section 33 of VATA 1994 permits the recovery of input VAT by councils, in certain situations, incurred in relation to outside the scope activities.

Mid Ulster District Council

Mid Ulster District Council was the lead case on this matter for the jurisdiction of Northern Ireland. HMRC contended that the charges should be VAT exempt following the London Borough of Ealing case. The local authorities disagreed and suggested that the charges are outside the scope of VAT on one of two grounds:

  • The supplies of leisure facilities are not economic activities within the meaning of the PVD, or
  • The supplies are provided by the councils acting as public authorities under a special legal regime so are not made by a taxable person

Article13 of the Principal VAT Directive (PVD) provides that Government bodies shall not be regarded as taxable persons in respect of transactions in which they engage as public authorities, unless their treatment as non-taxable persons would lead to significant distortions of competition. The Council argued that its supply of leisure and recreational facilities fell within these criteria.

Previous CJEU caselaw indicates that a public body can be treated as non-taxable where it engages in an activity under a “special legal regime” applicable to bodies governed by public law or under the same legal conditions as those that apply to private economic operators. The Tribunal primarily suggested that, when deciding if an activity is being engaged in under a special regime, the following factors are irrelevant:

  • The subject matter of the activity
  • The purpose of the activity
  • The fact that private operators carry out similar services

The Council argued that it provided leisure and recreational facilities pursuant to a requirement to do so contained in the Recreation and Youth Service (Northern Ireland) Order 1986, which essentially provides that Councils are required to provide recreational facilities. Noting that this is the case, the Tribunal turned to consider whether Article 10 constitutes a “special legal regime”. Observing that the requirements of the Order do not apply to the private sector, it concluded that this criterion was satisfied and went on to consider whether the Councils being treated as non-taxable persons would distort competition.

The Tribunal agreed with the Council (it was acting under a special regime) which highlighted the specific challenges which are faced by Northern Irish Councils and the lengths to which they go to deliver community relations outcomes. It was stressed how any private operator would not be able to deliver facilities that went any way close to being comparable to the community-driven facilities demanded from Councils. Therefore, the Council’s treatment as a non-taxable person does not significantly distort competition.

Chelmsford City Council

This was the lead case on this issue for the jurisdiction of England and Wales. Chelmsford City Council (CCC) argued that its supplies were outside the scope of VAT on three grounds:

  • Supplies of sporting and leisure facilities to the public are not “economic activities”
  • Such supplies are made in CCC’s role as a public authority acting under a special legal regime (therefore it is not a taxable person in respect of those supplies)
  • Such supplies are made in CCC’s as a public authority and it is, therefore, not a taxable person in respect of these supplies

The Tribunal did not accept that the supplies were de facto non-economic in nature and concluded that the supplies represented services given in return for remuneration. It then went on to consider whether Article13 of the PVD, which provides that Government bodies shall not be regarded as taxable persons in respect of transactions in which they engage as public authorities, applied in this situation.

CCC submitted that its supplies of leisure facilities constitute activities engaged in as a public authority governed by public law, under a special legal regime which does not apply to private operators. It maintained that it provides sports and leisure facilities pursuant to s.19 Local Government (Miscellaneous Provisions) Act 1976 (LGPMA) which confers powers on local authorities to provide recreational facilities. After considering CJEU case law on whether exercising a discretionary power is the same as discharging a mandatory obligation, the Tribunal concluded that s19. LGMPA did constitute a special legal regime for the purposes of Article 13 and observed that any private operator providing identical services in the same jurisdiction would not be doing so under the power of s19.

Furthermore, CCC exercised its discretionary power pursuant to s19 in pursuit of its objectives as a City Council which it documents as, inter alia, ensuring that the whole community is able to access and participate in sport and to promote sport as a method of furthering social inclusion. The reason for having exercised its s19 power itself demonstrates that CCC operates under a special legal regime which does not apply to private operators.

Holding in favour of CCC, the Tribunal observed that, in order for Article 13 to apply, there must be no significant distortion of competition. However, it did not comment on this, instead offering the parties the option to request a continuation hearing.

Constable Comment: The position has also been outlined for Scotland in the Midlothian Council case and is similar to that in England, Wales and Northern Ireland. The cases are not binding as they were only heard in the First Tier Tribunal. It is not known whether HMRC will appeal the decisions, but given the importance of the decision it is expected that they will. The decision had been confirmed first in Northern Ireland owing to special equality and diversity laws. This will be of interest to all public bodies which may wish to revisit the VAT treatment of similar supplies.

This newsletter is intended as a general guide to current VAT issues and is not intended to be a comprehensive statement of the law. No liability is accepted for the opinions it contains or for any errors or omissions. Constable VAT cannot accept responsibility for loss incurred by any person, company or entity as a result of acting, or failing to act, on any material in this newsletter. Specialist VAT advice should always be sought in relation to your particular circumstance.