Content

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.