Insurance and other financial services groups will be disappointed by three recent ECJ decisions5 as to the scope of the VAT cost sharing exemption (CSE).
The CSE, broadly, provides 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
• exempting the intra-group supply would not lead to distortion of competition.
The ECJ decisions concerned (amongst other issues) whether, and if so to what extent, a further condition also applies to CSE – namely whether the exemption is restricted to groups carrying on activities in the “public interest”.
The UK’s CSE closely follows the wording of the relevant provision6 in Council Directive 2006/112/EC (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 internally-provided services.
Earlier this year two advocate generals (AGs), in distinct cases, reached differing opinions on this issue. Most recently in April the AG in the case of European Commission v Federal Republic of Germany opined that German VAT legislation restricting the CSE to activities in the “public interest” was incompatible with the VAT Directive. This was tentatively welcomed by the insurance and other financial services sectors, in the knowledge that only the final ECJ decisions would provide clarity as to the scope of the CSE.
In recent weeks in separate cases the ECJ has held that CSE is only available to groups carrying on activities in the public interest. In the first decision (related but separate cases involving Aviva and DNB Banka) the ECJ ruled it was determinative that the CSE is contained in a section of the VAT Directive headed “Exemptions for certain activities in the public interest”. Accordingly neither Aviva nor DNB Banka was entitled to benefit from the CSE, as they carried on insurance and banking activities, respectively. On the same day in the Commission v Germany case, the ECJ reached the same view.
The impact of these decisions in the UK may not be immediate, as the UK will need to correct its national CSE legislation first. It seems likely that HMRC will consider the implications of these decisions in its ongoing consultation on the UK VAT group rules.