The VAT Cost Sharing Exemption

Many businesses and organisations want to join withsimilar businesses and organisations to share costs and resources.These arrangements usually allow the companies in question to claimback their VAT. Unfortunately for some charities and othernot-for-profit organisations, they will suffer VAT charges forthese services without the ability to claim the full amountback.

The Europe Union have passed a mandatory cost sharingexemption which is now being incorporated into UK law through theFinance Bill 2012 (Royal Assent is expected July 2012). TheGovernment is hoping to remove the "barrier to collaboration" andhas put forward the idea of cost sharing groups (CSG) that willshare costs without incurring VAT. The Government is anticipatingthat introducing this exemption could enable efficiencies foreducational institutions, charities and housing associations ofaround £100 million in costs and savings.

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

1. The members of the group are engaged in exempt ornon-taxable activities. The group itself must be independent andthe members must have ownership of the group. The draft legislationalso allows CSGs to be set up under the control of a single memberensuring that it is not just larger businesses and organisationsthat enjoy this benefit.

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

3. The group merely claims the exact reimbursement of thoseservices. This means that there cannot be any profit element to thecharges. However, any surplus will not be opposed if the CSG canshow that it will be used for legitimate futureexpenses.

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

The VAT cost sharing exemption is defined in broad andgeneral terms and it will rely on the detailed guidance produced byHMRC. This guidance will hopefully provide a more accurate insightinto the how the exemption will operate and clarifying the "greyareas" of the draft legislation (providing a definition for"directly necessary" for example).

Although the introduction of this cost sharing exemptionappears extremely beneficial to the organisations that will fallinto the requirements, there are some services that cannot beexempt. Commercial outsourced service providers will not be able tosupply VAT-free services to their customers, even if the customersagree to jointly procure the services.

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.