Decision details
CHE S439 Hackney Leisure Management Contract - Agency Agreement
Decision status: Recommendations Approved
Is Key decision?: No
Is subject to call in?: No
Decision:
Resolved:
The Cabinet Procurement and Insourcing Committee approved:
1. The variation to the Leisure Management Contract between the Council and Greenwich Leisure Limited (“GLL”), for GLL to run the leisure centres as an agent rather than a principal for the remainder of the current contract term, as outlined in paragraph 5.1 of the report; and
2. Delegate authority to the Group Director - Climate, Homes & Economy in consultation with the Interim Group Director - Finance and the Director - Legal, Democratic & Electoral Services to agree the terms of and enter into all necessary legal documentation in relation thereto.
Options Appraisal and Business Case (Reasons For Decision)
Leisure Management Contract Agency Model
– Concept
The Council’s Contract with GLL is a “traditional” (concession) leisure contract, where the Council leases the leisure facilities to GLL for a peppercorn rent, and GLL operates the facilities as principal providing the leisure services to the public. GLL retains the income from the leisure facilities and pays the Council an agreed share of any surplus generated.
As GLL provides the leisure facilities to the public as principal, the VAT liability of the sporting income is defined by GLL’s status. As an eligible body for the provision of sport, some of GLL’s supplies are exempt from output VAT and some are liable to output VAT at the standard rate. GLL is therefore required to undertake a partial exemption calculation to determine how much input VAT it is able to reclaim on the costs incurred in running the services. The irrecoverable portion of input VAT is incurred as a cost and is reflected in the costs of the services between GLL and the Council.
It is believed that up to 2023, the above arrangement represented the most VAT efficient route legally available, with the benefit of VAT exempt income outweighing the irrecoverable portion of input VAT.
However, following a court ruling in favour of local authorities and the determination that treating leisure services as non-business would not distort competition; HMRC issued Brief 3 in March 2023. The Brief makes it clear that a local authority' s income direct from users from the provision of leisure services can be treated as ‘non-business’ for VAT purposes, rather than ‘exempt’. This is the key change of circumstances from which the Agency Model opportunity is derived.
The change to HMRC policy potentially provides the Council, and its current partner GLL, with an opportunity to implement an arrangement, the ‘Agency Model’, with benefits to both parties by way of reduced costs, whilst protecting the Council’s risk position.
Under the Agency Model, GLL would become the Council’s agent for income collection. GLL would continue to commission / provide services and staff to run the centres. The Agency Model would result in GLL providing a standard rated, taxable service to the Council - that is the combination of the management of the leisure facilities and the provision of staff and services. This would then allow GLL to reclaim all of the input VAT it incurs on attributable expenditure.
Due to the changes in the VAT liability of supplies of leisure services by local authorities, there would be no adverse impact on the Council’s VAT recovery position such that VAT should remain recoverable in full and therefore there will be an overall ‘saving’ on the basis of moving from a position where GLL can recover VAT only partially, to one where full VAT recovery is achieved for both parties, with no additional cost for the users.
Leisure Management Contract Agency Model – In Practice
Under the Agency Model, the income from the leisure facilities would be income for the Council and any VAT that is due on that income would need to be paid by the Council to HMRC as part of its VAT returns.
As the provision of leisure by a local authority is now considered to be a non-business supply, any VAT charged by GLL to the Council for running the leisure facilities, and in relation to the costs of the facilities themselves, should be recoverable.
Under the Agency Model, GLL would still collect all customer sales income, but will be acting on behalf of the Council. GLL would provide a remittance note to the Council for this income.
GLL would also invoice the Council for service costs plus GLL’s margin as per the Contract; adjusted by any income under or over-performance to ensure GLL retains this key element of risk. The Council would be able to recover the VAT on this invoice.
The actual movement of funds (cash) will be an off-set between points above; whose quantum would be similar to at present, with the added financial benefit of the impact of the Agency Model (see paragraph 5.8 of main report). The surplus share mechanism would be retained under the Agency Model.
The Council recognises that sport and physical activity together with a quality leisure provision plays an integral part in the achievement of this vision and priorities. In particular, improving leisure provision contributes towards the achievement of at least three of the above themes - no. 1, 3 and 5.
The development of new facilities, such as the new Britannia Leisure Centre, has raised expectations and acted as a catalyst for further change to provide modern, cost-effective facilities and services that meet the needs of the local community.
Access to quality sport and leisure facilities is an essential requirement in improving the health and wellbeing of the local community. There are a number of ways access can be improved but fundamentally it involves providing the right facilities in the right place at the right price. Access to quality facilities for all residents is key to delivering the Council’s Community Strategy priorities (particularly ‘A borough with healthy, active and independent residents’).
Preferred Option
For GLL to operate the Council’s leisure facilities, which form part of the LMC, as an agent rather than a principal in order to deliver ongoing savings.
Alternative Options (Considered and Rejected)
The following alternative options have been
considered and rejected for the reasons outlined below:
Do nothing: GLL would continue to operate the Council’s leisure facilities for the remaining 5 years of the current LMC i.e. up to 31st March 2029, at nil cost to the Council. However, the Council would not benefit from the significant financial savings to be achieved from implementing the ‘Agency Model’, as outlined in paragraph 5.8 of the Exempt Appendix 1 to this report.
Termination of current contract and procurement of new operator: Termination of the current contract was considered but rejected as an option for the following reasons:
I.
The operational and financial performance of the incumbent operator
(GLL), together with service improvements over the years, would not
support termination on the grounds of deficiencies in quality or
service provision;
II.
The potential risk of legal challenge by GLL due to the early and
potentially unsubstantiated termination of the LMC;
III.
The financial implications of compensation payments to GLL for
early termination of the contract; and
IV. The risks associated with the appointment of a new and essentially unknown leisure operator together with the additional and unbudgeted procurement costs.
As this is an existing long term contract and the proposed Agency Model with GLL will secure savings for the 2025/26 financial year and ongoing (as outlined in the attached Exempt Appendix 1 to this report), without adversely affecting the on-going delivery or quality of service to local residents, no further options were explored.
Publication date: 07/01/2025
Date of decision: 06/01/2025
Decided at meeting: 06/01/2025 - Cabinet Procurement and Insourcing Committee
Accompanying Documents:
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