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HMRC internal manual

VAT Government and Public Bodies

Other local authority activities: contracted out leisure services: memorandum of understanding paragraph 4.1 to 4.6

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paragraphs 1 and 2 VATGPB8520 paragraph 3 VATGPB8530

4 VAT treatment of payments between parties

4.1 Local authorities may make payments to operators of leisure facilities. However, the nature of these payments can vary and their VAT treatment depends on the circumstances in which they are paid. In some cases they are simply a grant and are therefore outside the scope of VAT. In other cases, such amounts can represent consideration for a supply or third party consideration. Each case needs to be decided on its own facts.

4.2 Distinguishing between grants and payments can be difficult, especially when interchangeable terms are used, such as “deficit funding”. Where funding is freely given, with nothing supplied in return, then the payment is not consideration for any supply. This is normally the case with grants paid by public bodies. Conversely, where funding is given in return for specific goods or services, then that payment is consideration for a supply.

4.3 In recent years it has become increasingly common for grant monies to be awarded on condition that the recipient enters into a service level agreement and agrees to meet targets set out in that document. The funding body may even be entitled to quarterly progress reports. This does not of itself mean that a supply is being made in return for the funding. These agreements are often drawn up purely to ensure that the funds are used for the intended purpose, or “good housekeeping”.

4.4 To decide whether funding is a grant or consideration for a supply the following questions must be asked.

Does the donor receive anything in return for the funding?

If the donor does not benefit, does a third party benefit instead? And if so, is there a direct link between the money paid by the funder and the supply received by the third party?

Are there any conditions attached to the funding, which go beyond setting out the terms under which the funds are allocated and the requirement to account for how the funds are used (commonly referred to as ‘good housekeeping’)?

In the case of leisure centres, it is important to consider issues such as the historical provision of the facilities and the relationship between the parties. The answer to these questions will often indicate the nature of the payment.

4.5 For example, where leisure facilities are developed and owned by an operator who merely seeks financial support from the local authority for what has always been the operator’s own facilities, then this support is likely to be grant funding which is outside the scope of VAT.

4.6 Where, however, leisure facilities have been developed, owned and operated by the local authority, and the authority then contracts out the operation of those facilities - imposing conditions upon the contractor - any payments made by the authority to the contractor are more likely to be consideration for the contractor’s supply of agreeing to take over the provision of leisure services under the conditions imposed by the authority.

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paragraph 4.7 VATGPB8550 paragraphs 5 and 6 VATGPB8560