Non Profit Bodies Delivering Sporting Services – Next throw of the Dice? VAT Exempt or Standard Rated

As local authorities continue to consider whether the long-term delivery of sporting services remains within the council itself or moves to an Alternative Delivery Model - whether a charitable trust or commercial provider - the recent European Court judgement will be a required read. It considered the questions referred to them by the First Tier Tribunal in the case of the London Borough of Ealing (Ealing) council. There are ramifications however for any non-profit leisure services body to consider.

There are of course a range of factors that will influence the views of any council in terms of its longer-term plans but the nature of the VAT liability of income is a part of that thought process due to the very specific VAT rules that councils across the UK operate under.

As the council to which the case relates, Ealing contended that they had over declared VAT on income from sporting services on the basis that such supplies should be VAT Exempt under European law. HMRC rejected the claim and the matter was ultimately referred to the European Court (EC).

The EC found that the UK is entitled to set conditions on accessing the VAT Exemption by a public body; subject to any significant distortion of competition; but also stated that such a condition cannot be imposed on non-profit making bodies governed by public law unless it imposes the same condition on other non-profit making bodies.

It would be expected that changes in the VAT treatment of sporting services supplied by non-profit making bodies (whether governed by public law or not) will follow – the question will be in what regard.

• If the restriction on accessing the VAT Exemption is applied across all non-profit bodies then Trusts will generate taxable income rather than Exempt and irrecoverable VAT costs in those bodies will sharply reduce - although any contractual restrictions imposed on price increases may result in a reduction in revenue due to a VAT inclusive treatment having to apply.

• If the restriction is removed from public bodies then councils will be making Exempt supplies and will benefit from retaining their current pricing levels and the VAT element within those values. However, the increased level of Exempt income generation will need to be reflected in a council’s ability to continue to recover all their VAT on costs.

Councils currently have a very favourable partial exemption de minimis level which effectively allow them full VAT recovery on costs relating to generating Exempt income as long as the value of that VAT on costs remains below 5% of their total VAT costs. For some councils, this will mean that they recover VAT on costs relating to Exempt income areas which are amounts in the hundreds of thousands of pounds. This contrasts to the partial exemption rules for non-public bodies where, should VAT on costs relating to Exempt income areas exceed £7500 of VAT in a year, the right of recovery of that VAT would be lost.

Individually each council or indeed leisure trusts and other non-profit bodies delivering sporting services, will need to consider the potential ramifications of this judgement on their existing leisure service provision arrangements or when looking at alternative delivery models in the future.

Watch out for the next throw of the dice on this one therefore – Contact your Centurion VAT team and we’ll be happy to chat it through. EMAIL US or phone 01633 415390