A quiet shift in leisure management: Why the agency model is gaining ground
Introduction: A structural change, not just a tax solution
Local authorities across England are quietly reshaping how leisure services are delivered. While much of the early attention has focused on VAT efficiencies following HMRC’s revised treatment of in‑house leisure services, a deeper shift is underway. Increasingly, councils are adopting agency models not simply to improve financial outcomes, but to recalibrate risk transfer, operational control, and governance clarity.
For authorities operating under sustained budget pressure, the agency model offers a means of retaining strategic control over leisure services while continuing to rely on specialist operators for day‑to‑day delivery.
This article explores why the model is gaining traction, with particular emphasis on risk allocation and control often overlooked in the early stages of decision‑making.
From outsourcing to agency: What has changed?
Traditionally, leisure services have been delivered under management contracts where the operator acts as principal, assuming responsibility for income generation, pricing, and many operational risks leaving the local authority’s role as largely supervisory.
Following HMRC’s confirmation in March 2023 that many local authority leisure services qualify as non business activities for VAT purposes, councils have revisited whether this traditional structure still delivers best value. Operators have responded by proposing agency arrangements under which:
- The local authority remains the principal supplying leisure services to users
- The operator acts as agent, managing facilities and staff on the authority’s behalf
- Income is collected in the authority’s name, preserving its VAT status
While VAT efficiency is an important driver, the agency model also shifts the legal and commercial architecture of the relationship in more fundamental ways.
Risk transfer under the agency model: Substance over labels
A common misconception is that agency structures inevitably dilute risk transfer to the operator. In practice, well drafted agency agreements can preserve and in some cases improve risk allocation compared to traditional outsourcing.
What risks remain with the operator?
Experience from live arrangements shows that local authorities can continue to transfer substantial operational risk, including:
- Staffing and employment risk, with the operator retaining responsibility for recruitment, management, and employment liabilities
- Operating cost risk, including utilities, maintenance, and lifecycle costs
- Service performance risk, backed by KPIs, payment mechanisms, and step in rights
- Compliance risk, including health and safety, safeguarding, and statutory obligations
The critical point is that VAT principal status does not require the authority to run the service. HMRC’s focus is on the legal and economic reality of supplies, not on who bears operational burdens.
Managing HMRC risk without undermining commercial protections
As authorities retain principal status, an obvious concern arises: how to demonstrate a genuine agency arrangement to HMRC without inadvertently pulling risk back in house.
HMRC does not oppose agency models as a matter of principle, but it does examine them closely. Its focus is on substance over labels. An arrangement described as “agency” will only be respected if both the contract and the way the service operates reflect a true agent-principal relationship.
To assess this, HMRC applies a structured framework based around six “indicating factors”: title, identity, value, separation, no change, and nature and value. These factors do not require councils to dilute commercial protections. When applied thoughtfully, they sit comfortably alongside robust risk transfer.
In a leisure context:
- Title matters most where goods are supplied, such as retail items. Contracts should make clear when ownership passes to the authority and onward to the user, and operational practice must follow that logic. Areas such as catering, vending or events benefit from express clarification to avoid ambiguity
- Identity requires clear definition of which services are supplied by the authority (as principal) and which obligations the operator performs as agent. This is achieved through careful structuring of the service specification, not by fragmenting responsibility
- Value is about transparency. The authority must be able to see the value of supplies made on its behalf and any discounts obtained in that capacity. This is typically addressed through reporting obligations rather than operational involvement
- Separation requires the operator’s management or agency fee to be clearly identifiable and distinct from income collected for the authority. This prevents hidden consideration, without constraining commercial fee structures
- No change focuses on ensuring the operator does not alter the direction of the main supply. Customer facing documentation and invoicing therefore need to reflect that the leisure service is supplied by the authority, even though the operator delivers it
- Nature and value limits unilateral change by the operator. Authorities commonly retain control over pricing policy and core service parameters, while the operator manages performance and cost risk within that framework
What matters most is consistency. HMRC will look not only at the drafting, but at whether invoicing, memberships, reporting and communications align with the agreed structure. For successful schemes, implementation planning is therefore as important as the legal documentation.
Importantly, none of this requires the authority to take on operational exposure. Staffing, utilities, lifecycle costs, compliance and performance failures can remain contractually with the operator. The agency model is about preserving legal coherence and VAT integrity, not shifting operational burden.
Once that position is clear, attention turns naturally to how agency models are introduced lawfully.
Procurement and contract risk: planning the route, not reacting to it
The increased adoption of agency models has highlighted the importance of how they are introduced, not just whether they are commercially attractive.
Where existing leisure contracts are in place, moving to an agency structure will usually require a variation. Most of the current contracting arrangements would have been procured under the Public Contract Regulations 2015 or Concession Contract Regulations 2016 before the Procurement Act 2023 came into force. If the authority is looking to vary a contract that was procured under the Procurement Act 2023, then contract modification process pursuant to section 74 and Schedule 8 of that Act would need to be followed.
Authorities must be satisfied that the change is lawful under Regulation 72 of the Public Contracts Regulations 2015 (if originally procured as a services contract under those regulations) Regulation 43 of the Concession Contract Regulations 2016 (if originally procured as a concession contract under those regulations). This analysis will turn on the specific contract, its change mechanisms and the overall risk profile before and after the change.
For new procurements, the lesson from the market is clear. Authorities that address agency models transparently from the outset, whether as a required structure or a permitted variant, reduce challenge risk, preserve competitive tension and avoid difficult mid procurement recalibration.
Increasingly, councils are recognising that agency arrangements are not an exception to be justified, but a mainstream delivery option that should be assessed deliberately as part of strategic commissioning decisions.
Implications for local authorities
The rise of the agency model has several important implications for English local authorities:
- Governance: clearer alignment between democratic accountability and service delivery
- Risk management: greater precision in allocating operational and financial risks
- Financial resilience: improved income retention and VAT recovery
- Flexibility: enhanced ability to adapt services without structural renegotiation
However, these benefits are not automatic. Poorly designed agency arrangements can unintentionally expose authorities to risks they assumed had been transferred.
Actions local authorities should consider
Authorities contemplating an agency model should consider taking the following steps:
- Undertake a detailed risk mapping exercise comparing current and proposed arrangements
- Seek integrated legal, tax, and commercial advice at an early stage
- Review existing contracts for Regulation 72 flexibility and variation mechanisms
- Define non delegable authority controls, particularly around pricing and policy
- Stress test governance arrangements against HMRC and audit scrutiny
- Ensure operational reality matches contractual intent, especially invoicing and branding
Conclusion: a maturing model, not a passing trend
The agency model is no longer theoretical. It is now a live, evolving part of the local authority leisure landscape in England. While VAT efficiency may have opened the door, it is the ability to recalibrate risk, control, and accountability that is keeping the model firmly on the agenda.
For councils willing to engage with the detail and to structure arrangements deliberately, the agency model offers a sophisticated alternative to traditional outsourcing, capable of delivering both financial resilience and stronger public control.
How we can help
Freeths advises a wide range of local authorities on the delivery of leisure management services and the transition to agency and other operating models. Our experience spans the full life cycle procurement from early options appraisal and risk mapping, through selection of an appropriate procurement route and preparation of compliant tender documentation, to evaluation support, contract award, contract drafting, negotiation, mobilisation and ongoing contract management.
We also support authorities in navigating contract change and re procurement issues (including procurement law compliance such as ‘substantial modification’ analysis), helping to manage challenge risk while preserving commercial outcomes and the practical protections needed to deliver services day to day.
For further information, please contact Mohammad Sajjad, Managing Associate.
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Partner | Head of Natural Capital Law
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The content of this page is a summary of the law in force at the date of publication and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.
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