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HM Revenue and Customs Brief 3/18 - changes to the VAT exemption for cost sharing groups

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Published 22 March 2018

1. Purpose of this brief

This brief and the related VAT information sheet explain the immediate changes that are taking place in HMRCís policy following recent judgments in the 4 cases:

  • Commission v Luxembourg - Case C 274/15
  • Aviva Towarzystwo Ubezpiecze? na ?ycie S.A. w Warszawie (Aviva) - Case C 605/15
  • DNB Banka AS (DNB) - Case C 326/15
  • Commission v Germany Ė Case C 616/15

It also explains other matters and tells you about other areas that are under review and that may change later.

This brief should be read by existing cost sharing groups (CSGs) in conjunction with VAT Information Sheet 02/18. The VAT information sheet explains what transitional arrangements are in force for CSGs that have applied the exemption correctly based on earlier guidance. It also explains where current guidance is amended by this brief.

2. Who should read this Brief

This brief should be read by UK businesses in the finance, insurance and other sectors who have implemented a cost share group (CSG), or are thinking of implementing a CSG, and have relied on HMRCís published guidance in the Cost Sharing Exemption Manual, CSE1000 to CSE3000.

Accountants, consultants and others who provide VAT advice to the businesses referred to above should also read this brief.

3. What is the Cost Share Exemption (CSE)

As explained in the Cost Sharing Exemption Manual, (CSE1000), the cost sharing exemption (CSE) applies when 2 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 Ďco-operative self-supplyí arrangement (a term the EU Commission use) is created. Because the CSG is a separate taxable person from its members, itís able to make supplies for VAT purposes to its members. This exemption allows small providers who canít 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 wonít cover all shared service arrangements.

4. Explanation of changes

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 effect from the date of issue of this brief.

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 donít cover non-business activities and therefore CSGs engaged in these activities are unaffected by this change.

Thereíll 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 HMRC gives more guidance.

In any case of 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. Itíll 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 wonít be permitted where an uplift has been charged on transactions for transfer pricing purposes. Itíll remain the position that the CSE wonít be permitted in any other case where exact reimbursement canít be evidenced.

5. What happens next

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

HMRC will give more guidance at a later date.

6. Action required

CSGs should consider the impact of the judgments as set out above and read VAT Information Sheet 02/18. Contact HMRC if you need more information or if youíre asked to do so in the VAT Information Sheet.


About the Author

© Crown Copyright 2018.

A licence is needed to reproduce this article and has been republished for educational / informational purposes only. Article reproduced by permission of HM Revenue & Customs.



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Article Published/Sorted/Amended on Scopulus 2018-03-28 16:39:06 in Tax Articles

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