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Steve Allen of VAT Advisers Ltd reports on proposals for a helpful VAT exemption.

Introduction

In both the March and June 2010 Budgets, HMRC affirmed its intention to implement the EU cost-sharing exemption in the UK.
 
It is an exemption from VAT which is provided for in EU law, and applies where shared costs are recharged between partnered entities. If the exemption is applied in the UK (it is already in place in several other Member States), it would remove the irrecoverable VAT cost that otherwise arises on recharges of costs when organisations such as charities and housing associations share back-office expenses. Typical examples of these shared expenses would be costs relating to staff, HR, and IT expenses.

Cost-Sharing Group

Under the terms of the exemption, interested parties must come together to form a cost-sharing group (‘CSG’) which is able to meet the following conditions:

• an independent group must be formed;
• the group members must carry out exempt or non-business activities;
• the value of group charges for services must equal their cost;
• the services must be "directly necessary” to the members' exempt or non-business activity

• the services supplied by the group must not cause a distortion of competition

Consultation Process

HMRC has advised that, prior to implementation, there would be a consultation process with interested parties. This consultation is expected to be announced shortly, although the current expectation is that an implementation of the exemption will not now occur before the end of 2011.

We would recommend those organisations interested in adopting the exemption to consider taking part in the consultation, as this could have a significant bearing on how HMRC subsequently operates the exemption in the UK.

It is worth noting that where a Member State has not yet implemented the exemption, the EU law can still be relied upon. This means that, in theory, interested parties can choose to adopt the exemption ahead of HMRC’s implementation. However, given that other Member States put slightly different interpretations on the criteria for exemption, and that HMRC may well do the same, it would be wise to write to HMRC in advance and seek formal approval that the exemption can be applied.