Out-Law News 2 min. read

Charities and universities to benefit from VAT exemption for shared services


The Government will implement EU proposals that will allow charities and universities to share services without charging each other VAT, according to proposals published in today's draft Finance Bill 2012.

The Government has published a response to its consultation on a VAT exemption for services shared between VAT-exempt bodies, including charities and universities. It has also published draft legislation implementing its proposed changes.

Businesses and organisations looking for cost efficiencies often work with others to share costs and resources. Under UK law is that many of these arrangements result in VAT being charged between the participants. This is not a problem for those participants who can reclaim the VAT on those arrangements but it is an issue for which are unable to recover the VAT in full.

This includes charities, universities, banks and insurance companies.

Under the cost sharing exemption once a cost sharing group is formed it is relieved of having to charge VAT on supplies made to its members. The VAT exemption would not, however, relieve all forms of shared service arrangements from VAT. In particular, commercial outsourced service providers will not be able to provide services VAT-free to their customers, even if those customers come together to jointly procure the services.

The cost sharing exemption is a mandatory exemption in EU law which had not been implemented in the UK.

"The draft legislation essentially quotes the EU Directive that the UK became bound to implement into national law many years ago," said John Christian, a tax law expert with Pinsent Masons, the law firm behind Out-Law.com. "However, HMRC's summary of responses to its consultation published today give a steer as to how the requirements of the Directive will be interpreted in the UK, although much detail is still be thrashed out in guidance between now the legal implementation next Summer."

"It is to be welcomed that the Government and HMRC appear to be accepting that some of the requirements need to be interpreted quite flexibly to make the exemption workable in practice," he said.

Her Majesty's Revenue and Customs (HMRC) considers that there are five basic conditions that have to be met before the exemption can apply. These are that there has to be an 'independent group' (a 'cost sharing group' or CSG) supplying services to persons who are members of it; the members have to make exempt and/or non-business supplies; the services supplied by the CSG must be ‘directly necessary’ for the exercise of the members’ exempt or non-business activities; the services must be supplied at cost (‘exact reimbursement’), and use of the exemption must not cause or be likely to cause distortion of competition.

The first of these conditions appears to indicate that the Government has softened its stance on the requirement for group to be "independent", by conceding that a member of the CSG could control it.

"The Government had previously suggested that to fall within this requirement no member of the CSG would be able to control it, which was met with strong opposition during the consultation," said Jon Robinson, a tax law expert at Pinsent Masons. "This change in approach offers opportunities for group cost-sharing structures."

Reservations about the plans had been expressed by the commercial service provider sector that a VAT exemption for supplies by CSGs will distort competition as commercial providers would have to charge VAT on the same services.

HMRC appears to have ruled out allowing commercial providers to challenge the arrangements if they believe the competition condition has been breached, instead favouring an approach where "potential breaches will be examined on a case by case basis".

The Government said that it would introduce the exemption when the Finance Act 2012 receives royal assent this Summer, but to ensure that any exemption is compliant with EU law and that it minimises any scope for tax avoidance, the Government will consult further on the measures and publish further guidance, it said.

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