Accountancy firm PKF (UK) has warned that a comment from the government yesterday in a guidance note regarding the cost-sharing VAT exemption may leave room for the Treasury to water down the proposals in the original consultation document.

The Treasury is expected to publish draft legislation on Tuesday outlining the detail of the cost-sharing VAT exemption announced in yesterday’s Autumn Statement Document. But in a note issued after the Chancellor’s statement yesterday afternoon, HMRC stated that the actual implementation of the exemption would be materially different from that contained in the consultation document that the sector responded to earlier this year.

Richard Wild, director of VAT at PKF, said: “The introduction of the cost-sharing exemption is long overdue as it has the potential to give many charities a much-needed cash boost.

“The detail will be revealed in draft legislation next week, but HMRC has already announced that the actual implementation ‘differs in a number of material ways from that outlined in the Consultation Document’ earlier this year. This is a concern.  

“We hope that the exemption will still encompass the type of support services that exempt and not-for-profit organisations wish to share: making it easier for them to realise the VAT savings that the EU rules are intended to make available.”

The cost-sharing exemption, which is already enshrined in EU law, exists to mitigate the VAT costs where small or medium-sized organisations which undertake non-taxable activities, buy in services that larger organisations would carry out in-house - such as IT support, accountancy services, legal advice and so on. The exemption envisages smaller organisations teaming up to form an association to buy in or provide these services to its members. The association then shares the cost of the services to its member organisations, without having to charge VAT on these recharges.