Revenue and Customs Brief 10/18 - VAT cost share exemption
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of this brief
This brief explains a further change to HMRC’s policy
legal judgments on the cost share exemption (CSE).
Revenue and Customs Brief (3) 2018 detailed previous changes which
have been added into guidance. Paragraph 5 of that brief explained that
HMRC was still considering the impact of the judgments on:
- the test for directly necessary services which enables cost share
group (CSGs) to ignore certain
non-qualifying supplies for the CSE
- the social housing sector
This brief is about HMRC’s conclusions on the test for
The review of the use of the CSE
by social housing associations has not been completed, so there is no
change to the guidance at this time.
UK businesses who are thinking of implementing or have already
implemented a cost share group (CSG),
and have used HMRC’s guidance in the previous Cost Sharing
manual CSE3720 to CSE3840 on directly necessary services.
Accountants, consultants and others who provide VAT advice to the
The CSE allows persons
who carry on activities covered by certain exemptions to join together
to form a CSG so they can
acquire services and recharge their members for their use of the
services at cost without incurring any additional sticking VAT.
This exemption allows small providers who cannot 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. The circumstances where the CSE applies are fully explained in
the VAT Cost Sharing Exemption manual CSE 1010.
Luxembourg has a rule where residual costs used by a CSG could be treated as qualifying for
exemption under the CSE if
up to 30% of those costs were also used by the members to make taxable
supplies. The UK has a similar test but with a lower percentage of 15%.
This is referred to in this brief and the former guidance as the
‘directly necessary’ test.
The Advocate General in Commission v Luxembourg (Case C-274/15) said
that the CSE could not be
used for such costs and this was confirmed by the Court in its
judgment. The current tests for directly relevant services are
therefore withdrawn from 15 August 2018.
This means some CSGs will
have to register for VAT if they go above the current registration
threshold, however they may not need to do this before 31 December 2018
because of the transitional arrangements in paragraph 5.
4. Changes to HMRC’s policy
The Court in its judgment held that the CSE was not restricted to CSGs whose members exclusively
carried on exempt or non-business activities. Services which are bought
by the CSG for mixed use could
qualify for the CSE, but
only to the extent that they were directly necessary for exempt or
non-business activities by the members of the CSG.
HMRC is therefore introducing guidance on a suitable apportionment
calculation which may be used where it is practicable to do so, and the
conditions for its use can be met.
Apportionment of the recharge of costs by the CSG to its members will be allowed if
the CSG can carry it out fairly
and keep records necessary for HMRC to verify the calculation. Full
details are in the updated VAT Cost Sharing Exemption manual pages
CSE3850 to CSE 3895.
HMRC reserves the right to refuse the exemption:
- if the records to justify the apportionment used have not been
- in any case of avoidance or abuse
5. Transitional arrangements
CSGs that have correctly used
the previous guidance can continue to use the previous tests for
directly necessary services until 31 December 2018, to give them time
to make sure the correct records are set up and kept.
The previous tests are set out in the VAT Cost Sharing Exemption
manual pages CSE 3720 to
The transitional arrangements cannot be used or relied on in cases:
- of tax avoidance
- where there is likely to be a distortion of competition
Services invoiced or paid for before 31 December 2018 will only
benefit from the transitional arrangements to the extent that
performed before that date (specifically the basic tax point under
section 6(3) of the VAT Act 1994 will apply).
Where prepayment or invoices cover services to be performed both
before and after that date, then a reasonable apportionment will be
6. Action required
CSGs should read the updated
guidance on directly necessary services and consider the impact of the
changes to the rules.
Contact HMRC if you need more information.
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Article Published/Sorted/Amended on Scopulus 2018-07-31 20:00:00 in Tax Articles