The VAT Cost Sharing Exemption

Many businesses and organisations want to join with similar businesses and organisations to share costs and resources. These arrangements usually allow the companies in question to claim back their VAT. Unfortunately for some charities and other not-for-profit organisations, they will suffer VAT charges for these services without the ability to claim the full amount back.

The Europe Union have passed a mandatory cost sharing exemption which is now being incorporated into UK law through the Finance Bill 2012 (Royal Assent is expected July 2012). The Government is hoping to remove the "barrier to collaboration" and has put forward the idea of cost sharing groups (CSG) that will share costs without incurring VAT. The Government is anticipating that introducing this exemption could enable efficiencies for educational institutions, charities and housing associations of around £100 million in costs and savings.

In the draft legislation published in December 2011, a new Group 16 (supplies of services by groups involving cost sharing) will be added to the Value Added Tax Act 1994. To take advantage of this VAT exemption four key obligations need to be met;

1. The members of the group are engaged in exempt or non-taxable activities. The group itself must be independent and the members must have ownership of the group. The draft legislation also allows CSGs to be set up under the control of a single member ensuring that it is not just larger businesses and organisations that enjoy this benefit.

2. The supply is made for and is "directly necessary" for the exercise of the relevant activity. There may be an introduction of a percentage threshold by HM Revenue & Customs (HMRC) for the organisations with limited taxable activity. The consequences of this would mean a limit to the scope of the type of entity which can cause the exemption. However, this has not been confirmed.

3. The group merely claims the exact reimbursement of those services. This means that there cannot be any profit element to the charges. However, any surplus will not be opposed if the CSG can show that it will be used for legitimate future expenses.

4. The relief from VAT by cost sharing cannot cause a distortion of competition.

The VAT cost sharing exemption is defined in broad and general terms and it will rely on the detailed guidance produced by HMRC. This guidance will hopefully provide a more accurate insight into the how the exemption will operate and clarifying the "grey areas" of the draft legislation (providing a definition for "directly necessary" for example).

Although the introduction of this cost sharing exemption appears extremely beneficial to the organisations that will fall into the requirements, there are some services that cannot be exempt. Commercial outsourced service providers will not be able to supply VAT-free services to their customers, even if the customers agree to jointly procure the services.

Posted on: 01/05/2012

This article is for general guidance only. It provides useful information in a concise form. Action should not be taken without obtaining specific legal advice.

Back to News articles
Back to News articles

Sign up to email news

Sign up to receive email updates and regular legal news from Rollits LLP.

Sign up