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13 May 2026
Author: Tim Farr, Managing Partner
With budgets under pressure and leisure services still expected to deliver health, wellbeing and place-based outcomes, more local authorities are revisiting their operating models. One approach gaining momentum is the “agency model”, where the operator runs the facilities but does so as the council’s agent for specified customer-facing supplies—helping to reduce VAT leakage while retaining outsourced delivery.
For years, outsourcing leisure centres has meant a familiar trade-off: a specialist operator brings expertise, commercial discipline and scale, but the VAT profile of leisure income and costs can make the model more expensive than it needs to be. Recent shifts in HMRC’s approach to local authority sports and physical education supplies—reflected in Revenue and Customs Brief 3/2023 and guidance commonly relied on in the sector—have led some councils to re-examine whether parts of their leisure offer can be treated as “non-business” when delivered in the council’s name.
In a nutshell, the agency model separates (a) the day-to-day operation and management services supplied by the operator to the council from (b) the leisure services supplied to customers. Under a well-structured agency agreement, the operator is expressly appointed as the authority’s agent for the relevant “leisure services” and collects income on the authority’s behalf. Contract wording often makes this explicit: leisure income is treated as the authority’s revenue (even if collected and accounted for by the operator), and the authority remains accountable for VAT where taxable supplies are made.
Why does that matter? Because the VAT position can improve on both sides. Internal project materials for recent implementations describe the core benefit as improved VAT recovery for the contractor (reducing irrecoverable input VAT that would otherwise sit in the operator’s cost base), which can translate into a lower overall operating cost. At the same time, the council takes on the VAT accounting for the supplies made in its name—recognising that some income streams remain taxable, while others can be treated as non-business or exempt depending on the activity and the council’s property/VAT elections.
A common misconception is that the agency model “removes VAT”. It doesn’t. What it can do is reduce VAT friction by aligning the contractual supply chain with how leisure services are treated for VAT when delivered by a local authority. Most facilities have a mixed basket of income: sports admissions and memberships; hire; courses; soft play; parties; retail; and catering. Even in agency structures, councils typically still need to account for output VAT on taxable streams (for example, where premises are opted to tax or where the activity is inherently taxable), while some items—such as non-sport tuition—may remain exempt.
That mix is why good drafting is so important. Specialist tax reviews on live projects often focus on whether documentation consistently supports a VAT-efficient agency structure, while also carving out areas where the operator may act as principal (commonly for catering and some goods) so that VAT is accounted for correctly and consistently. Clarity about what is “in agency” and what is “out of agency” is not a technical nicety—it is a core risk control.
HMRC will look beyond labels to the substance of the arrangement. Teams implementing these models often talk about needing to “follow the money”: who sets prices, who contracts with customers, where income is held, how refunds are processed, and whether reporting lines and controls match the stated agency. If customer income is meant to be the council’s revenue, the agreement (and the operator’s finance processes) must show that it is collected and accounted for on that basis.
Other pressure points include lifecycle and maintenance works (is the operator buying as agent or as principal?), and property arrangements (for example, whether occupation is by lease or licence). Some councils also build in “contingency” wording so that, if the structure is later found not to meet HMRC’s agency requirements, the parties must work together to agree compliant changes—or revert to a taxed model if that cannot be achieved.
The agency model is not a silver bullet, and it is not “just VAT”. Done well, it is a governance-led redesign of who supplies what, to whom, and on what terms—while keeping specialist operators in place to deliver safe, attractive facilities. For councils willing to do the detailed work on scope, controls and documentation, it can be a compelling way to protect frontline leisure provision and reduce avoidable VAT cost in the system.
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This article is for general information only and does not constitute legal or professional advice. Specific legal advice should be sought in relation to particular facts or circumstances.
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This article is for general awareness only and does not constitute legal or professional advice. The law may have changed since this page was first published.
