CASH-strapped Dumfries and Galloway Council is to receive a bumper £2.1m back from HMRC – after being taxed incorrectly for the past 16 years.

The refund was revealed after several councils, including Dumfries and Galloway, launched a legal challenge against HMRC for wrongly taxing the council’s leisure services earnings.

HMRC backed down – and will now return millions backdated to 2007.

A report on the matter has been produced for the council’s finance committee next week. It reads: “Members were informed that HMRC had recently indicated that local authority leisure and sport services will now be treated as a non-business activity for VAT purposes, meaning that VAT would no longer need to be paid on income generated from these activities.

“Members were also informed that the backdating of this change in treatment was under review.

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“The council’s advisers on this matter have recently indicated that HMRC has confirmed that this change in treatment can be backdated to February 2007 and that the council is due a VAT refund relating to this period.

“It is anticipated that the net income to the council will be around £2.1m after deduction of advisers’ fees.”

It was initially reported in August that the council would save around £250,000 per year due to changes in taxation rules around leisure services.

However, the backdated cash situation has come as a surprise and much-needed boost for the council coffers.

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Prudent finance bosses are now suggesting that the £2.1m windfall is tucked away in the council’s reserves due to the uncertainty about finances because of ongoing staff pay negotiations and the impact of the council tax freeze next year.

It is projected that Dumfries and Galloway Council’s leisure services will generate an income of nearly £1.24m this year.

Of this amount, leisure memberships will account for £848,700, admission fees will be £278,080, while general fees will generate £109,500.

When VAT calculations are done, the council will retain £247,256 that would normally be paid to HMRC.