VAT exemption and cost sharing groups

Mon 26 Mar 2018

Following several recent decisions from the CJEU, Revenue & Customs Brief 3/2018 sets out changes to HMRC policy on the cost sharing exemption (CSE) by members of cost sharing groups (CSGs) with effect from 22 March 2018.  A VAT information note (2/2018) sets out how the policy change is to be applied.  The information notes contains an appendix of the changes to HMRC’s published guidance in this area.

For further discussion of VAT cost sharing arrangements, please get in touch with a member of the Mazars VAT team.

The changes:

Restriction of the CSE

The CSE will be restricted to members who engage in the exempt activities in the following Exemption Groups in Schedule 9 of the VAT Act 1994, with effect from 22 March 2018.

Exemption groups:

• postal service (Group 3)
• education (Group 6)
• health and welfare (Group 7)
• subscriptions to trade unions and professional bodies (Group 9)
• sport (Group 10)
• fund raising by charities (Group 12)
• cultural services (Group 13)

The [CJEU] judgments don’t cover non-business activities and therefore CSGs engaged in these activities are unaffected by this change.

There will be interim measures for existing CSGs that have operated the previous guidance correctly. Those CSGs will be allowed to apply and rely on the previous guidance until 31 May 2018. However these transitional arrangements can’t be applied or relied on in cases of tax avoidance or where there’s likely to be a distortion of competition. Where an existing CSG has applied the previous guidance correctly, and foresees a significant difficulty in applying these transitional arrangements in the permitted timeframe, they should contact HMRC by 1 May 2018.

Housing associations can continue to apply the CSE for the time being until HMRC gives more guidance (they are currently considering the implications of the decisions for housing associations). In any case of avoidance or abuse, HMRC will apply the guidance from the court from the date of the judgments.

Application of the CSE to UK members only

HMRC policy will be amended to restrict the CSE to members located in the UK. It’ll no longer be permitted to apply the exemption for transactions with members located in other EU member states. The CSE has not been permitted for members located outside of the EU, and this will remain the position.

CSE and transfer pricing

A CSE won’t be permitted where an uplift has been charged on transactions for transfer pricing purposes. It will remain the position that the CSE won’t be permitted in any other case where exact reimbursement can’t be evidenced.

The cost sharing exemption

The cost sharing exemption (CSE) applies when 2 or more organisations (whether businesses or otherwise) with exempt or non-business activities join together on a co-operative basis to form a CSG. A CSG is a separate, independent entity, set up to enable its members to supply themselves with certain qualifying services at cost and exempt from VAT.

As a result a ‘co-operative self-supply’ arrangement (a term the EU Commission use) is created. Because the CSG is a separate taxable person from its members, it’s able to make supplies for VAT purposes to its members. This exemption allows small providers who can’t afford to acquire assets on their own account to benefit from the same overall VAT position as larger providers who can afford to purchase the assets themselves. Thus the more members of a CSG there are, the greater the potential savings and lower the costs per member of operating the relevant CSG.

The CSE applies only in very specific circumstances and won’t cover all shared service arrangements.