Technical briefing

The VAT Cost Sharing Exemption Consultation explained

Finance | Colin Laidlaw | 8 Jul 2011

After a long delay HMRC has finally issued its consultation on how the cost sharing exemption, that is permitted under Article 132(1)(f) of the EU VAT Directive, could be introduced into UK legislation. Colin Laidlaw explains.

Several charities may collectively decide to outsource their front/back office activities to one entity that centrally performs these functions on behalf of all involved.  The benefit being that cost savings can be made by economies of scale. However, currently recharges of the costs to the individual entities involved would be subject to VAT, if the entities are not in the same VAT group.

This VAT charge is likely to be an additional cost where it relates to the exempt or non business activities carried out by the entities and therefore any possible cost saving of centralising staff, admin, IT etc may be negated.

Cost sharing exemption

It is expected that the cost sharing exemption will help charities and entities carrying out exempt or non business activities to reduce the VAT incurred on shared costs.

Interpreting the EU Directive, HMRC has stated that there are five conditions to be met before the cost sharing exemption would apply as detailed below:

• Cost sharing group – An independent group supplying services to persons who are members of it
• Members – Members have to make exempt and/or non-business supplies
• Directly necessary - The charges are directly necessary to the exempt or non-business activities
• Recharges - The recharges are made at cost
• Distortion of competition – Use of the exemption should not cause or be likely to cause distortion of competition

Possible points of contention/interest in defining the model for the exemption are:

• Possible restrictions to the types of exempt activities that members should carry out in order to benefit from the exemption.
• Introduction of a minimum level of exempt and/or non-business activity that an entity needs to perform in a year in order to be a member.
• The method by which an entity decides which costs are directly necessary for exempt or non-business activities.

Consultation

The purpose of the consultation is to outline HMRC’s views on how the conditions will be applied in practice and any limits to its use. HMRC invites comments on a possible model for a cost-sharing exemption that could be introduced in the UK and asks specific questions to enable HMRC to assess the impact of implementing the exemption.

The consultation document can be accessed on HMRC’s website by typing ‘cost sharing’ into the search box.

If you have set up or are thinking of setting up a cost sharing group then you would need to consider the impact of HMRC’s consultation and make representation to HMRC directly or through a representative body as appropriate. The contact details for where responses can be submitted by the deadline of the 30 September 2011 are as follows:

David Bond
HMRC
VAT Directorate Team
VAT Projects
3C/10
100 Parliament Street
London SW1A 2BQ
Tel: 020 7147 0058
Email: david.bond2@hmrc.gsi.gov.uk

Colin Laidlaw is a VAT senior manager at BDO

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