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
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
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
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
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.
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