Revenue and Customs Brief 3/18 - changes to the VAT exemption for cost sharing groups
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Published 22 March 2018
of this brief
This brief and the related VAT
information sheet explain the immediate changes that are taking place
in HMRC’s policy
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 – 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 HMRC’s published guidance
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 ‘co-operative self-supply’ arrangement (a
term the EU Commission use) is
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
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
The CSE applies only in
very specific circumstances and won’t cover all shared service
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.
- 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
unaffected by this change.
There’ll be interim measures for existing CSGs that have operated the previous
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. It’ll no longer be permitted to
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
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
other case where exact reimbursement can’t 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 you’re asked to do so in the VAT Information Sheet.
About the Author
© Crown Copyright 2018.
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Article Published/Sorted/Amended on Scopulus 2018-03-23 20:00:00 in Tax Articles