Is the provision of local authority sports and leisure facilities outside the scope of VAT? Yes, but TBC

Scotland

Background

A dispute arose between councils across the UK and HMRC in relation to VAT liability of charges paid by members of the public for access to sports and leisure facilities provided by those authorities. There were three nominated cases for each of the territorial jurisdictions: (i) England & Wales (Chelmsford City Council v HMRC [2020] UKFTT 432 (TC)); (ii) Scotland (Midlothian Council v HMRC [2020] UKFTT 433 (TC)); and Northern Ireland (Mid- Ulster District Council v HMRC [2020] UKFTT 434 (TC)). This update will focus on Midlothian but will highlight significant differences in the three decisions.

In sum, the councils argued that the charges do not attract VAT; HMRC rejected this, saying that the charges bear VAT at the standard rate. Midlothian and Chelmsford put forward three alternative grounds for their claim (Mid- Ulster District Council only put forward the first two):

  1. its supplies of sporting and leisure activities to members of the public are not “economic activities” within the meaning of article 9 of Directive 2006/112/EC, and are therefore outside the scope of VAT;

  2. for the purposes of article 13 of the Directive, its supplies of sporting and leisure activities to members of the public are provided in its role as a public authority acting under a special legal regime, and therefore it is not a taxable person in respect of those supplies; or

  3. the effect of the Value Added Tax Act 1994 Sch.9 Group 10 Note 3 exempted from VAT the "supply by an eligible body to an individual of services closely linked with and essential to sport or physical education in which the individual [was] taking part". However, Note 3 stated that a local authority was not "an eligible body".

1. The no ‘economic activity’ argument

The main argument here was that the charges did not constitute “renumeration” for the purposes of article 9 of the Directive. However, in all three cases, this argument was rejected. The Tribunal stated that this question required a wide-ranging, fact-sensitive, objective enquiry. The Tribunal found that supplying the services was a core activity of each council and raised significant revenue. Almost all users paid something; the fact that many received concessionary rates was not important. Additionally, although the cost of providing the facilities exceeded the sums received from users, the charges nevertheless made a significant contribution. The fact that large proportions of the costs were subsided by EU and central government grants was irrelevant, as was the fact that the facilities were provided to fulfil statutory duties.

2. The ‘special legal regime’ argument

Article 13 of the Directive specifically provides that bodies governed by public law are not to be regarded as taxable persons in respect of the activities or transactions in which they engage as public authorities. However, the second paragraph of article 13 states that this exemption does not apply where that treatment would lead to “significant distortions of competition”.

In all three cases, the Tribunal was satisfied that the services in question were being provided by public authorities acting under a special legal regime. However, in Chelmsford and Midlothian, the “significant distortions of competition” point was not addressed by the parties, so the Tribunal did not reach a conclusion. The Tribunal did, however, grant the parties leave to apply for a continuation hearing to address this.

Conversely, in Mid-Ulster District Council, the Tribunal was happy to make a finding on the “significant distortions of competition” point without a further hearing. The Tribunal found that there was no comparable alternative provision of the activities in Northern Ireland. There was no real possibility of any private provider being able to meet the requirement to provide adequate facilities, given the demanding requirements relating to community equality: these requirements went beyond a general need for fairness and non-discrimination, and extended to enhancing integration and attacking all forms of social deprivation. Accordingly, treating the council as a non-taxable person would not lead to significant distortions of competition, within the meaning of article 13.

3. The ‘Note 3’ argument

This argument was only advanced by Chelmsford and Midlothian. In light of the findings that the councils were operating under a special regime, this argument was not relevant; however, the Tribunal gave its view. In sum, the Tribunal said that local authorities constituted “eligible bodies” for the purposes of Value Added Tax Act 1994 Sch.9 Group 10; therefore, their supplies of services were exempt supplies. The Tribunal used the recent CJEU decision in Ealing (Case C-633/15) to come to this conclusion. Accordingly, the Tribunal held that Note 3 (which stated that a local authority was not "an eligible body") was ineffective. It was observed that Group 10 should have been amended to reflect the Ealing decision; however, the fact that it had not yet been amended by Parliament was irrelevant.

Commentary

This decision has wide ranging implications and should be of particular interest to local authorities. As it stands, a large number of activities carried out by local authorities may now fall outside the scope of VAT, provided that such authorities are under a statutory regime which imposes conditions or obligations on said authorities. The Tribunal did not consider what the position would be if the local authority has the option to provide services, other than under that relevant statutory regime. This is likely to be a contentious point that will need clarification.

Additionally, the distortion of competition point still needs to be clarified for councils in Scotland and England and Wales. We will be paying close attention to these developments, so keep an eye out for our updates. In the meantime, if you have any questions, please do not hesitate to get in touch with one of our key contacts.

Article co-authored by Innocent Maramba.