VAT Cost Sharing Exemption
The UK Government has confirmed its intention to implement a cost-sharing VAT exemption for organisations such as charities, universities, housing associations and financial institutions. A consultation process has taken place which invited contributions from charities and other affected groups and the legislation will be introduced by the Finance Bill 2012. Draft legislation and the responses document will be released on 6th December, however legal implementation will occur when the Finance Bill 2012 receives Royal Assent in early 2012.
Currently, EU law allows an exemption where shared costs are recharged between partnered entities. The exemption is designed to remove the irrecoverable VAT arising on recharges of costs between those organisations that cannot fully recover VAT. Typical examples would include supplies of staff, IT expenses and other goods and services.
As outlined in the consultation document, to benefit from the exemption the following conditions will have to be satisfied:
1. An independent cost sharing group (“CSG”) of persons must be formed supplying services to members of the group;
- “persons” includes individuals and legal persons including corporate entities;
- The CSG must have a separate identity that distinguishes it from its individual members so it could be capable of VAT registration in its own right;
- A CSG can be a corporate entity, partnership, JV, unincorporated association or European Economic Interest Group (“EEIG”);
- Members need to be independent of each other and the CSG should operate independently of its members;
- HMRC see the independence rules preventing a commercial operator from using a CSG as a vehicle to obtain commercial advantage; however it is acceptable for a CSG to engage with a third party to provide services to the CSG (as long as they can be replaced with alternative suppliers if this is the will of the CSG).
2. The group members must carry out exempt or non-business activities;
- HMRC expect all members to engage in some exempt/non business activity
- HMRC has indicated it may impose a minimum level of exempt/non business activity to prevent avoidance.
3. The services must be “directly necessary” to the members’ exempt or non-business activities;
- HMRC accepts that all supplies received by members from CSGs can be treated as “directly necessary” where those businesses and organisations have wholly exempt and/or non business supplies or negligible levels of taxable supplies;
- If not, partial exemption methodology would have to be used to determine whether supplies are directly necessary for exempt/non business activities.
4. The services must be supplied at cost (exact reimbursement);
- Must be no profit element in recharges to members.
5. The services supplied by the group must not cause a distortion of competition.
- A European Court has previously dealt with this point and confirms that the exemption can only be denied when it is the relief from VAT (and not any other condition of the exemption) that it provides that gives rise to a distortion of competition.
In practical terms, the exemption will be best suited to situations where the association provides the services from pooled resources, or adds value to bought in goods/services, e.g. with its own labour costs. Merely passing on the cost of a simple purchase of goods or services would not bring any benefit under this provision and would negate any proportion of recovery the buyer may otherwise be entitled to.
A final point to bear in mind is that, as this is an exemption, any input VAT incurred by the independent group would be irrecoverable because it will relate to VAT exempt recharges to its members
Potential impact on charities and “VAT averse” organisations
Without doubt, the beneficiaries of this legislation will be businesses and organisations that cannot recover all of their VAT due to exempt or non business activities. This will include charities, educational organisations and health and welfare organisations but also financial institutions.
As outlined above, organisations wishing to benefit from this exemption will need to work together to generate the VAT savings available (enabled by the exemption), however additional benefits may also be available due to increased purchasing power of the independent group.
If you would like additional information on the cost sharing exemption, please contact Lynn Gemmell our VAT Director on 0131 558 5800 or email lynn.gemmell@chiene.co.uk