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HMRC internal manual

VAT Government and Public Bodies

Other local authority activities: contracted out leisure services: memorandum of understanding paragraph 4.7

For … go to … For … go to …
paragraphs 1 and 2 VATGPB8520 paragraph 3 VATGPB8530
paragraph 4.1 to 4.6 VATGPB8540    

4.7 Such arrangements, where payments are found to be consideration, can give rise to various supplies depending upon whether the contractor is acting as an agent of the local authority or as a principal. Some VAT consequences of these are described below.

4.7.1 Principal agreements i.e. where the NPDO or independent contractor supplies the facilities to the user

a) Contractors’ responsibilities

The payments made by the local authority to the contractor are usually in the form of an annual management fee and/or a variable “contractor’s deficit”, normally intended to make good any overall shortfall between the takings and operating costs. Under the circumstances described in paragraph 4.6 above, this may represent the consideration for a standard-rated supply by the contractor of agreeing to operate the leisure facilities subject to the authority’s conditions.

In some circumstances a contractor may be obliged to repay some of the gross/net profits to the local authority if, for example, they exceed an agreed level over a period of time (a “contractor’s surplus”). These payments normally represent a reduction in the management fee payable by the local authority and VAT credit note procedures will apply.

Where any monies paid over by the local authority to the contractor are directly linked to prices charged to users, then such payments may represent third party consideration for use of the facilities. The contractor is therefore obliged to account for VAT on the same basis as the normal takings and this cannot be recovered as input tax by the local authority.

b) Local authorities’ responsibilities

With the exception of where payments represent third party consideration as described above, any VAT charged to the local authority by a contractor acting as principal in respect of the management fee or deficit funding will be recoverable in full by the authority subject to the normal rules. VAT charged by the contractor in these circumstances is not attributable to any lease or licence to occupy granted by the local authority to the contractor.

There will be a liability on the part of the authority to account for output tax (subject to an option to tax having been exercised), on any amounts received in respect of the grant to the contractor of a tenancy or a license to occupy the leisure facilities. However, where there is no rent or a peppercorn rent payable by the contractor, the grant of the tenancy or licence to occupy will normally represent a supply for no consideration.

Where there is neither monetary payment nor non-monetary consideration from the contractor to the local authority for a lease or licence to occupy, this is seen as a non-business transaction for the local authority. Any VAT which the authority incurs on costs attributable to the premises will be recoverable under section 33 of the VAT Act 1994 subject to the normal rules.

Under some arrangements the contractor is obliged, as a condition of taking over the running of the leisure facilities as a principal, to periodically pay an agreed fee to the local authority. So long as this is not rent payable in connection with the granting of a tenancy or licence to occupy the leisure facilities, it will normally represent consideration for a standard-rated supply of the granting of the right to operate the facilities by the local authority to the contractor.

4.7.2 Agency agreements

The contractor is liable to account for VAT on its supply of agency services to the local authority. Consideration for this supply will comprise any amounts paid to the contractor by the local authority and any amounts retained by the contractor from the takings.

The VAT charged by the contractor to the local authority will be attributable to the supplies which the authority makes from that facility. It must be apportioned between taxable and exempt supplies in accordance with the authority’s section 33 refund method (i.e. its partial exemption method), and will be recoverable subject to the authority’s partial exemption position.

Any amounts paid over by the contractor to the local authority in respect of the takings collected on behalf of the local authority, will be outside the scope of VAT so far as the contractor is concerned. The liability to account for VAT on the takings remains with the local authority (see paragraph 5.1).

In some cases the contractor may incur operating expenses as agent for the local authority. Where the supplies are subject to VAT, any entitlement to input tax deduction rests with the local authority. However, if the contractor acts in its own name in relation to the expenses there is a requirement under section 47(2A) of the VAT Act 1994 in the case of goods, for the supply to be treated as being made to and by the agent. Where this applies the contractor may recover the VAT involved as input tax (subject to the normal rules) and is required to account for output tax on the onward supply to the authority. Supplies of services may (if the parties wish) be treated in the same way under section 47(3). There is a requirement to account for the tax on the onward supply in the same tax period as it was recovered.

For … go to …
paragraphs 5 and 6 VATGPB8560