VAT cost-sharing exemption

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13 February 2012

After years of pressure from the third sector to introduce legislation already operating in other parts of the EU, the Government has confirmed that the Finance Act 2012 will introduce an exemption to allow charities and other not-for-profit organisations to collaborate without paying VAT for their services to each other.

Sharing back-office services such as IT and HR improves efficiency and reduces costs. Yet under existing law, charities would incur what can be described as an "artificial VAT charge" on the buying-in of such services that most private sector companies do not have to pay. The new exemption will remove this barrier to efficiency by encouraging VAT exempt bodies to come together via cost sharing groups (CGS) that hire staff and acquire other resources in order to provide services to their members on a cost-only basis.

Draft legislation published on 6 December 2011 confirms that the following five conditions must be met:

Those sharing costs must be members of an independent cost sharing group, a separate entity;

The Government had previously suggested that to fall within this first condition no member of the CSG would be able to control it, which would have significantly restricted the ability of smaller charities to benefit from the exemption. The draft legislation, however, allows CSGs to be set up under the overall control of a single member, providing the flexibility for well-resourced charities with existing staff and expertise to take the lead in facilitating these models, to the benefit of the wider sector.

The members must make exempt or non-business supplies;

These must amount to a minimum of 5% of total supplies over a prescribed period of time.

The supply must be made and must be "directly necessary" for those exempt or non-taxable activities;

Concerns have been raised over the meaning of "directly necessary", and whether "back-office" costs will qualify. Whilst the draft legislation does not specifically clarify this, HMRC have stated that charities will only be able to take advantage of the exemption to procure any services (including back-office services) that are not "directly necessary" if 85% or more of their activities are "exempt or non-business" activities.

The goods and services provided must be charged at the cost to the group of procuring them ("exact reimbursement");

The CSG must be a not-for-profit group and members must pay their share of the joint expenses of the CSG. However, the creation of a surplus will not be objected to if it can be shown to be a provision against legitimate future expenses, however.

The provision of services by the group should not lead to distortions in competition

HMRC are of the opinion that the fact that members receive supplies at cost and free of VAT cannot in itself cause unlawful distortion of competition.

The exemption will be effective from the date that the Finance Act 2012 comes into force (usually July), and HMRC are in the process of engaging with stakeholders to draft clear guidance as to how the exemption will be implemented in practice.

For further information please contact Nicola Manclark on 0117 9022743 or

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