22/01/2026
A common theme across the local government sector is the struggle to deliver leisure services that are financially sustainable, flexible, and genuinely utilised by constituents against the ever-shrinking internal budgets for delivery.
With operating costs increasing and stretched in house teams, many local authorities are looking at differing structures to drive efficiency savings and the agency model is becoming increasingly prevalent within the market.
By adopting an agency model, operators charge VAT on their fees for running the leisure centres, while local authorities can reclaim VAT from HMRC, allowing operators to recover previously irrecoverable VAT on their costs.
Currently, around 60% of UK leisure centers operate via external partnerships. Of those who have converted, some authorities report the financial uplift is between £80,000 and £100,000 per facility.
These savings are warmly welcomed, especially given risk factors in the market such as increased energy bills for leisure sites jumping by more than 150% for many councils between 2022 and 2024.
A correctly structured agency model allows councils to stay in control, set the pricing matrix at facilities, manage community outcomes and align service delivery with internal policy provision whilst benefitting from specialist leisure operator knowledge and expertise.
As budgets tighten and leisure expectations continue to shift, agency modelling is becoming less of an experiment and more of a practical, proven option for authorities. However, risk remains with HMRC not providing full guidance on the requirements any agency model will need to demonstrate beyond the six principles of agency. If HMRC were to determine that a specific contract does not meet the required six agency principles test, both the operator and the council would be open to challenge. This would likely result in a reduction in services or a cost reviewing exercise that undermines service quality to make up the loss.
The key here is the legal, financial and tax input to creating a legally compliant agency model to ensure the relevant HMRC principles and tests are satisfied whilst achieving the correct risk apportionment. With the added issue of no industry standard contract for an agency model, precision in the drafting will be important, including clearly identifying the operator as agent and authority as principal whilst consistently aligning the relevant risks and responsibilities to these roles. This must be mirrored in the everyday operational reality e.g. branding and marketing, distinctions of funds and accounts and review of the business rates as well as adapting property arrangements. Any mid-term variations must also ensure compliance with the relevant procurement legislation HMRC will not look kindly on existing arrangements which are relaunched without any real operational changes.
Having upfront legal and financial interface into the bespoke contract can assist in addressing these key risks within the drafting, and within the operational reality.
Our dedicated Local Government team is here to provide support to local authorities. Reach out to Sophie Mallon or Kirtpal Kaur Aujla to discuss how we can help your team, and follow our dedicated Central & Local Government page for local authority legal insights.
