On 31 July 2018, HMRC issued a Business Brief confirming a change in policy in respect of the VAT Cost Sharing exemption (“CSE”). From 15 August 2018, cost sharing groups (“CSG”) may need to register for, and charge, VAT on certain supplies which do not relate to exempt or non-business activities of its members and which would previously have been ignored. CSGs have until 31 December 2018 to comply with this change.

The cost sharing exemption:

Organisations that carry out certain VAT exempt and/or non-business activities may club together to buy-in services required for them to carry out such activities. For smaller organisations, this enables cost saving by creating economies of scale. A specific VAT exemption relating to such cost sharing activities, the CSE, applies to ensure such organisations achieve a VAT saving too.

The mechanics of the CSE are that a number of organisations (the “members”) form a separate entity, known as a cost sharing group or CSG, which buys in services from a third party (subject to VAT). The CSG then supplies these services its members, at cost, but exempt from VAT. Irrecoverable VAT would sit within the CSG but the cost passed on to the members is generally lower because of the economies of scale, and because one of the requirements of the CSE is that the CSG is not entitled to charge an uplift, there is no additional profit element to be borne by the members.

In addition to the requirements above, for the CSE to apply, the arrangements must not be likely to distort competition and the services supplied by the CSG must be “directly necessary” for the exercise of the members’ respective exempt and/or non-business activities.

Change in policy:

It is in relation to the meaning of “directly necessary” that HMRC’s policy has changed. HMRC previously accepted that provided that at least 85% of the services provided by the CSG entity were directly attributable to the exempt and/or non-business activities of the relevant member, the remaining 15% could still benefit from the CSE. However, following the decision of the European Court of Justice in The Advocate General in Commission v Luxembourg (Case C-274/15), this threshold no longer exists. This means that:

  • it is not a pre-requisite for all members of a CSG exclusively to carry on exempt and/or non-business activities
  • the CSE in respect of services supplied by the CSG will only apply to the extent they are used by the member for its exempt and/or non-business activities such that other supplies will be subject to VAT if the CSG exceeds the VAT registration threshold.

HMRC is introducing guidance on a suitable apportionment calculation, although it may accept other apportionments if they are carried out fairly and the necessary records are kept for verification by HMRC. CSGs have until 31 December 2018 to comply with this change of policy.