From HMRC's VAT ruling to procurement flexibility, how councils and operators are leveraging the agency model for financial efficiency.
In 2023, the Court's VAT ruling against HMRC on the in-house delivery of leisure services by local authorities fundamentally altered the landscape for the operation of council-owned leisure centres. This article considers how the agency outsourcing model has developed since, and asks whether it has now become the norm.
Two years on: the view from the early adopters
In late 2023, we explored HMRC's revised guidance (published in response to the Court's landmark decision) which confirmed that in-house leisure services were to be treated as non-business supplies for VAT purposes. This was a policy shift that promised significant savings for local authorities. A year later, we examined how the sector responded, with the rise of the agency outsourcing structure offering a practical solution for outsourced operators. Two years on, it is time to ask: have councils and operators benefitted from the new agency model?
When HMRC revised its VAT treatment of in-house leisure services, councils gained the ability to remove VAT from income and recover VAT on related costs. The financial implications were clear: six-figure savings per leisure centre and a sector-wide windfall worth hundreds of millions of pounds. But the question lingered. How would outsourced leisure operators adapt?
Fast forward two years, and the answer is becoming clearer. The agency outsourcing model is now firmly embedded in the leisure sector. Initially adopted by a handful of forward-thinking councils and operators, the model has gained considerable momentum as its benefits prove hard to ignore.
Under traditional outsourcing arrangements, operators, often charitable trusts, incurred irrecoverable VAT on costs, eroding margins and limiting reinvestment and/or returns to the commissioning councils. The agency model reversed this dynamic. By positioning operators as agents collecting income on behalf of councils, both parties could maximise VAT recovery: councils reclaim VAT on operator fees, while operators recover VAT on their own costs. The result is a structure that aligns financial efficiency with service delivery, and one that benefits both sides of the relationship.
Early adopters reported savings that could be reinvested to improve leisure provision or used to offset rising costs in other services. Gainshare provisions in contracts ensured that benefits were shared, fostering collaboration rather than competition. For many, this was not just a tax solution; it was a reimagining of the outsourcing relationship.
Procurement issues: comfort and flexibility
One of the early concerns was whether contract variations to introduce the agency model would breach procurement rules. Two years on, there is increasing comfort that these changes qualify as non-substantial modifications under procurement law, provided they are carefully structured and documented. This reassurance has accelerated adoption, allowing councils to implement the model without triggering a full re-procurement exercise.
At the same time, the Procurement Act 2023 has introduced the competitive flexible procedure, giving authorities a powerful tool to test the agency model against traditional outsourcing during new procurements. This flexibility enables councils to explore innovative structures while maintaining compliance and transparency, an important development for those seeking VAT efficiencies without compromising governance.
Is it now the norm?
Evidence suggests the agency model is moving from niche to mainstream. Contract variations surged through 2025, and by 2026, new outsourcing tenders increasingly include a requirement for bidders to submit proposals under an agency model (at least as a variant option). Legal advisors and VAT specialists have refined their templates, reduced complexity and accelerating implementation. For councils under pressure to deliver balanced budgets, the model offers a rare opportunity: significant savings without sacrificing outsourced expertise.
However, "norm" does not mean universal. Some authorities remain cautious, citing governance concerns and the need for robust audit trails. HMRC's guidance, while supportive, demands strict compliance, particularly around income flows and contractual wording. Authorities further site the absence of specific HMRC guidance on the exact structure of an agency arrangement, deeming the risk of relying on wider legal and tax principles for agency structures to be too great. For operators, the challenge lies in adapting systems and processes to reflect their new agency status.
What's next?
As adoption grows, attention is turning to optimisation. Could the principles underpinning the agency model extend beyond leisure? Even where other services do not benefit from the non-business VAT status, can the savings realised from the agency model be used to support less profitable activities such as cultural services, museums and libraries? Meanwhile, technology is playing a role, with digital platforms emerging to streamline VAT reporting and contract management.
The bigger question is whether HMRC will revisit its stance or provide more definitive guidance on the leisure agency model specifically. For now, the agency model thrives in the space created by the 2023 ruling and HMRC's subsequent guidance. But as fiscal policy evolves, councils and operators must remain agile, ready to pivot if the landscape shifts again.
Two years on, the agency model is no longer an experiment; it is a proven mechanism delivering tangible benefits across the local authority leisure sector. With procurement law now offering both flexibility and reassurance, its trajectory suggests it will become the default approach for outsourced leisure services. For local authorities and operators alike, those who have not yet considered this model would be well advised to do so.
For more information in relation to Leisure Agency Structures, please contact Louis Sebastian (lsebastian@trowers.com) or Amardeep Gill (agill@trowers.com).
