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The exemption enables a cost sharing group (CSG) to supply services to its members without charging each other VAT where five criteria are met:
- the CSG is an ‘independent group of persons’ supplying services to its members;
- all members must carry on exempt or non-business activities for VAT purposes;
- the exemption will only apply to services which are ‘directly necessary’ for the members exempt or non-business activities;
- only a member’s individual share of the expenses incurred by the CSG in making the exempt supplies can be recovered; and
- the application of the exemption to the supplies made by the CSG to its members is not likely to cause a distortion of competition.
Since the exemption was implemented in UK law by the Finance Act 2012 it has been applied successfully by charitable housing associations and higher education bodies.
For example, in one of the first projects of this type Thrive Homes and Watford CHT created a new residents' enterprise as part of a national pilot in late 2012. The project involved Thrive and Watford CHT taking their budgets for aids and adaptations works that are carried out on residents' houses (so they can live independently for longer) and routing the work through a new residents’ enterprise, Jobs at home, established to provide extra jobs and training.
In fact, the project involved ‘nested’ cost sharing groups: both the residents’ enterprise, Jobs at home, and a coordinating body The Housing Leadership Foundation which provided services to Jobs at home and other similar organisations became costs sharing groups. That meant that the Housing Leadership Foundation could support Jobs at home without the need to charge VAT for the central services provided. Jobs at home, in turn could provide services to both Watford CHT and Thrive Homes without charging VAT on its services – and make real savings on the current levels of expenditure.
So by using the exemption, the two housing associations were able to increase the economic value they delivered and create new employment opportunities by spending the same sums of money in a different way.
While some charities like these have used the exemption to significant savings, take up in other parts of the sector has been slower. This is in part because finance directors have wanted to wait to see how the criteria for the exemption are applied in practice. The case of the West of Scotland Colleges Partnership provides an insight into just that.
The Partnership is a collaborative body set up by 22 Scottish colleges with a view to sharing the costs of seeking EU, central and local government funding. The Partnership claimed that the contributions to its running costs from each college were covered by the cost sharing exemption and sought a refund of £102,216.77 of VAT. HMRC refused the repayment.
The main issue was whether the amounts received from the colleges amounted to "exact reimbursement" of each college's share of the joint expenses. This is one of the conditions for the costs sharing exemption to apply. The Tribunal stated that the term "exact reimbursement" should be applied stringently, but not so as to limit the practical application of the exemption. In practice the Partnership's costs were simply shared out among the 22 participating colleges, because it was argued that each drew the same benefit from the Partnership. Where the Partnership provided individual services to one college that would be paid for by the individual college.
However, the Tribunal concluded that the Partnership had not produced evidence supporting an exact or even an approximate calculation of “exact reimbursement” and the Partnership’s records fell short of satisfying the test of "exact reimbursement" and dismissed the appeal.
Perhaps unsurprisingly, one of the areas where the Partnership tripped up was in failing to perform a full reconciliation of the costs charged to members leaving the cost sharing group.
For more information
See: West of Scotland Colleges Partnership [media type="link" id=352]
This article was first written for Civil Society - click here to view their website.
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