Chelmsford Council VAT case - Non Business Treatment of Leisure Services

This is just one of the cases that has been in the VAT arena dealing with the treatment of leisure services by local authorities across the UK. Other cases are running in Scotland and Northern Ireland but they all focus on the question of whether a council can regard this provision as non-business and therefore outside the scope of VAT. The value of this interpretation for local councils is that due to the VAT regime they operate under they are able to recover all their VAT costs incurred in connection with their non-business activities. Getting non-business treatment confirmed is therefore a real benefit to local authorities in managing their VAT recovery position.

The Chelmsford case had gone through the First Tier Tribunal and the council had been successful but HMRC appealed and therefore this judgement comes from the Upper Tribunal which sets a precedent for others therefore.

The decision from the Upper Tribunal was also supportive of the non-business treatment by a council of these activities, accepting the legal arguments that the council operate under a special legal provision in respect of their role to support the health and well being of the community, through the provision of leisure facilities. Their intention and objectives being very different from commercial providers in this regard.

There have been other challenges in this regard in recent years which had led to some council “opting” to treat their leisure activities as business but as VAT Exempt business supplies. Whilst this might sound equally as beneficial what was developing was a risk that as council spent large capital sums to improve their leisure facilities – often in the millions – the VAT on these costs was creating the risk that the council will breach what is known as its 5% de minimis VAT recovery threshold and that would risk a loss of VAT recovery on all the VAT it was incurring in delivering VAT exempt activities in areas such as crematories as well as leisure provision.

Therefore the Upper Tribunal decision on the non-business treatment of leisure services by a council will be welcomed across the UK by local authorities. It remains to be seen if HMRC will continue in its challenge to the decision and progress to a higher court.

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