Take-up of the cost-sharing exemption, which allows charities to reduce their VAT bill if they set up a new organisation to administer the sharing of back-office services with other charities, has been low, according to anecdotal evidence from accountancy firms serving the sector.

The cost-sharing exemption was enshrined in UK law last July following years of lobbying by voluntary sector representatives who complained that the need to pay VAT deterred charities from seeking efficiencies by sharing back-office services such as IT, finance or HR.

But despite widespread jubilation when the exemption was finally enacted, very few charities have so far taken advantage of it.

Accountants have cited various reasons for the low take-up, including the complexity of the regulations and HMRC’s guidance, the high level of uncertainty around various provisions, and the high up-front costs of setting up a cost-sharing group.

Colin Laidlaw, associate director at Baker Tilly, said: “Charities are just not that interested at the moment.
“The rules are quite cumbersome and in order to satisfy the requirements you do have to jump through quite a few hoops.  It would be very easy, if you’re not careful, to fall foul of the rules.”

However, Richard Wild (pictured), partner at PKF, said that even though the guidance is already pretty detailed, the complexity of the regulations meant that even more guidance was needed to help charities understand the implications.

He said: “Setting up a cost-sharing group is a very expensive process, with set-up costs and legal fees, and charities want to know exactly where the goalposts are.”

Wild said one of his clients had already encountered a situation where the advice provided by HMRC on a particular problem contradicted the published guidance.  “HMRC are not trying to be difficult – they are just trying to get to grips with it themselves – but it’s proving to be a bit more difficult in practice than we had all hoped,” he said.

Another problem cited by both Wild and Laidlaw is the condition that the cost-sharing group must be owned by its members, but if a member ceases to meet the qualifying criteria for any reason, it must leave the group.

Wild said: “How does it leave the group, in that case?  Does it have to sell its shares, relinquish its shares, how does it get out – does it have a length of time to do so or does it have to leave immediately? These sorts of issues just aren’t clear enough.”

Laidlaw said the exemption is “not the panacea charities expected it to be”.  

“You don’t save VAT on everything, only on some things, mainly labour-intensive services between the cost-sharing group and the members, but if you have to buy goods which are then sent on to members, these still have VAT on them if they did normally.  Once that’s been explained to charitable groups a lot of them say, 'oh it’s not so great after all'.”

He said there is some interest in the exemption from non-departmental public bodies who have stopped being quangoes and are now charities, as they are looking for ways of keeping their costs down.  A number of housing associations are also interested, “but no-one’s really biting yet”.

Charity Tax Group is hoping to set up a meeting with HMRC shortly to discuss the issues.