The memorandum identifies the various types of supply normally involved with the provision of local authority leisure services, and sets out how VAT is to be applied. HMRC point out, however, that its contents will be subject to review from time to time to reflect changing commercial practice and any relevant VAT Tribunal or Court decisions.
The Brief advises that local authorities are commonly involved in the provision of leisure services in three particular ways:
1. by a direct service organisation (DSO) within the local authority’s own leisure services department;
2. through a non-profit distributing organisation (NPDO), e.g. a charitable trust or industrial and provident society, in which the authority may have a degree of representation;
through a wholly commercial independently owned ‘for profit’ leisure management contractor.
In the case of a DSO, all supplies continue to be made by the local authority. However, where the leisure facilities have been developed, owned and operated by the local authority, and the authority then agrees with an NPDO or commercial operator that it will take over the operation of the leisure facilities subject to the authority’s conditions, this process is known as “contracting out”.
The Brief gives advice on how to determine which party is actually making the supplies to the users of the leisure facilities, notionally splitting the matter into two specific scenarios as follows:
1. ‘NPDO contractors’
Where operation of the leisure facilities is taken over by an NPDO contractor, common practice is for the premises to be leased to it by the local authority for a peppercorn rent. From there, the NPDO will usually act as a principal for VAT purposes when making supplies to users of the facilities.
2. ‘Independent contractors’
An independent contractor will normally run the leisure facilities as a principal. However, there can be instances where the contractor agrees to act as an agent of the authority in running certain facilities. HMRC say that past agreements between local authorities and contractors have been ambiguous, and have led to uncertainty over the status of some independent contractors. As such, HMRC advise that current agreements should make clear the status of the contractor and fully reflect the arrangements under which the parties are to operate.
The Brief goes on to give useful guidance on the liability of payments made between local authorities and NPDO or independent contractors, including things such as the repayment of surpluses and ‘deficit funding’.
Any business advisor acting for an NPDO or independent contractor would be well advised to obtain a copy of the revised memorandum, and copy it to their client.
Insider Tax Tips
Were you affected by the recent floods?
HMRC have announced that they are prepared to take a sympathetic attitude to you, by agreeing to waive interest on unpaid tax and by deferring collection of tax. Their flood helpline is 0845 3000 157.
Have you had a tax investigation?
Did it result in no additions to your profits or additions on a technical basis to the year of investigation only, so there was no “fraudulent or negligent conduct”?
If so, you can treat the professional fees incurred as an expense of your business – either for the year they were incurred if your business is continuing, or for the last year of trading if the business has ceased – see HMRC’s Tax Bulletin No. 37 for details.
PAYE Settlement Agreement
Do you provide incentives for your employees in the form of outings, weekend breaks, and so forth? Talk to your Tax Adviser about settling the tax due on these with an annual “PAYE Settlement Agreement”.
Do you receive a Self Assessment Tax Return each year?
If not, and if you have made a capital gain in the tax year ended on 5 April 2007, or if you had a new source of untaxed income such as rent, you must notify HMRC by 5 October 2007. If you have started up as a trader (alone or in partnership) the deadline is stricter – three months from the date you started to trade.
Are You Selling Your Business?
As well as the tax planning for the sale itself, remember that you need to consider inheritance tax – your business probably benefited from 100% Business Property Relief for inheritance tax, but once you have sold it, you need to consider planning to mitigate inheritance tax on the sale proceeds – which do not qualify for Business Property Relief.
£40K “letting relief”
Do you own (or have you recently sold) a house that was occupied by an elderly relative before 5 April 1988? Did they pay you rent, or has it been let since? HMRC have recently announced a change in their interpretation of the rules for the £40K “letting relief” – they now accept that this is due on “dependent relative” properties as well as on properties that have been your own main residence.