HMRC’s VAT information sheet explains what transitional arrangements are in force for Cost Sharing Groups (CSG)
that have applied the exemption correctly based on earlier guidance. It also explains where current guidance is being amended
The changes are relevant to UK businesses in the finance, insurance and other sectors who have implemented a CSG or are thinking of implementing a CSG, and have relied on HMRC’s published guidance in the Cost Sharing Exemption Manual, CSE1000 to CSE3000.
Accountants, consultants and others who provide VAT advice to such businesses should also read this brief.
Cost sharing exemption (CSE) applies when two 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.
The immediate effects of the judgments are as follows.
(a) 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 immediate effect. 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 judgments don’t cover non-business activities and therefore CSGs engaged in these activities are unaffected by this change.
There’ll be interim measures for existing CSGs that have operated the previous guidance correctly.
Housing associations can continue to apply the CSE for the time being until HMRCgives more guidance.
In any case of tax avoidance or abuse, HMRC will apply the guidance from the court from the date of the judgments.
(b) 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.
(c) A CSE won’t be permitted where an uplift has been charged on transactions for transfer pricing purposes. It’ll remain the position that the CSE won’t be permitted in any other case where exact reimbursement can’t be evidenced.
There may be further changes as HMRC is considering the impact of the judgments on:
- the test for directly necessary services which enabled CSGs to ignore certain non-qualifying supplies for the CSE
- the social housing sector
CSGs should consider the impact of the judgements as set out above and read VAT Information Sheet 02/18.
Our VAT experts can also offer more guidance of the application of CSGs and the implications for your business. get in touch today if you want to discuss any aspect of CSGs or VAT more generally.
