On 5 April 2017, the advocate general (AG) in the case of European Commission v Federal Republic of Germany11 opined that German VAT legislation restricting the VAT cost sharing exemption (CSE) to activities in the “public interest” was incompatible with the VAT Directive12.
The CSE, broadly, provides for an exemption for VAT on services provided within groups whose members make exempt (or non-business) supplies provided:
• the intra-group supplies are “directly necessary” to enable the group members to make such exempt (or non-business) supplies;
• only each member’s exact share of the cost of the intra-group supplies are recovered; and
• exempting the intra-group supply would not lead to distortion of competition.
The UK’s cost sharing exemption (CSE)13 closely follows the wording of Article 132(1)(f) of the VAT Directive. The UK’s CSE does not, however, refer to activities “in the public interest” (unlike the heading of the Chapter of the VAT Directive which contains the CSE). HMRC’s published guidance makes clear HMRC’s view that no such restriction applies to the CSE, so that insurers, banks and other financial service providers have assumed the CSE can apply to their internallyprovided services.
The AG in the present case took the view that the VAT Directive heading was not determinative.
This latest opinion will be welcomed by those exempt sectors, notably banking and insurance, that will have been greatly concerned by earlier opinions of a different AG in two separate cases, which included the opposite conclusion.
It now falls to the ECJ to decide which opinion it will follow, and this will be watched closely by insurers, banks and others.