The new VAT cost sharing exemption has now been introduced into UK legislation.
Businesses and organisations often work with others to share costs and resources. Under UK law many of these arrangements result in VAT being charged between the participants. Under the cost sharing exemption, once a cost sharing group is formed it does not charge VAT on recharges between its members. The exemption is available when two or more organisations (not necessarily businesses) having exempt and/or non-business activities come together to form a separate entity, a cost sharing group (CSG). This entity will then supply its constituent organisations at cost on a VAT exempt basis.
There are five conditions attached to the exemption:
* There must be an ‘independent group of persons’ (a CSG) supplying services to persons who are its ‘members’.
* All the members must carry on an activity that is exempt from VAT or one which is not a business activity for VAT purposes.
* The services supplied by the CSG, to which the exemption applies, must be ‘directly necessary’ for a member’s exempt and/or non-business activity. This test, if applied strictly, would render the exemption of little practical use. This is because organisations are more likely to share general overhead services. As many have an element of taxable activity the exclusivity test would be impossible to meet. To make the exemption more helpful, HMRC have taken the view that the exemption will also apply to a service, if the member’s taxable use of it is less than 15%.
* The CSG only recovers, from its members, the members’ individual share of the expenses incurred by the CSG in making the exempt supplies to its members. In order to benefit from the exemption, no profit can be made on the supplies made to CSG members.
* The application of the exemption to the supplies made by the CSG to its members is not likely to cause a distortion of competition.
All these conditions have to be satisfied for a supply to be exempt.
Due to the above conditions needing to be met it is likely that CSG’s will not be commonplace, however if you would like more information on VAT, or taxation for Charities, including our free help sheet on the new CSG exemption rules, please contact us on the number below, or using our online form.