HMRC Confirms New VAT Benefit for Exempt Businesses

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Date: 16/12/11

HMRC has announced the introduction of a new VAT cost sharing exemption in respect of shared services.  The proposals have been welcomed by exempt businesses and tax professionals.

In short, the Exemption will allow businesses and organisations who have exempt or non-business activity to join with others in a cost sharing group (CSG).  This will enable them to share costs and resources to create efficiency savings, without incurring irrecoverable VAT on the services provided to them by the CSG

The benefit of the Exemption will therefore extend to a wide range of sectors including:

  • Charities
  • Housing Associations
  • Universities
  • Further Education Colleges
  • Banks
  • Insurance Companies
  • Residential Care and Nursing Homes

The Chancellor announced in his Autumn Statement on 29 November that the Exemption would be introduced, and draft legislation was published on 6 December.  The Exemption stems from the EU VAT Directive, which provides that the supply of services by an independent group of persons who are carrying on exempt or non-business activities for VAT purposes will be exempt from VAT, where the services are directly necessary for the activities carried on by members of the group.  The UK has not previously implemented this provision into national law, despite much lobbying to persuade it do so. 

There is more legislation to come in the form of regulations, which will provide for more detail in respect of the main conditions.  HMRC will also publish guidance to compliment the legislation.  The Exemption will come into effect when the 2012 Finance Bill comes into force, which is likely to be in July 2012.


In the meantime, we have the bare bones of the new rules.  There is a series of conditions which must be satisfied before the Exemption will apply, which are as follows:

  • The CSG which provides the services to its members must be a separate legal entity;
  •  It must be owned and controlled by its members;
  •  Ownership and control of the entity can be shared equally between members, or a majority of ownership and control can vested in one member;
  •  In order to qualify for membership of a CSG, members will have to make a minimum of 5% exempt and/or non-business supplies over a prescribed period of time;
  •  The supplies made by the CSG to its members must be "directly necessary" for their exempt and/or non-business activity.  All supplies received by a member will be treated as directly necessary where at least 85% of supplies made by the member are exempt or non-business related;
  • The consideration for supplies made by the CSG to its members must be an "exact reimbursement" of the members' share of the joint expenses.  This basically means that the CSG cannot make any profit in supplying services to its members; and
  • The application of the Exemption must not give rise to a distortion of competition.


Much of the detail concerning how these conditions and the exemption will operate in practice is yet to be confirmed by the publication of further regulations and HMRC guidance. 

In their responses to the Consultation, charities and social housing associations raised concerns regarding the requirement for the CSG to be a separate legal entity from its members.  Some of the reasons for this concern included loss of members' control of assets and staff, employment issues such as TUPE and pensions, additional costs, dilution of branding and customer service, and different procurement cycles and IT systems.

HMRC have confirmed that the requirement for a separate legal entity will remain, as any alternative arrangements would fall outside the parameters of the Exemption prescribed by the Directive.  It will therefore not be possible to operate a CSG on a purely contractual basis.  However, HMRC have confirmed that it will be possible for one member to control, and own a majority stake in, the CSG.  It is hoped that this will make the Exemption more usable for smaller organisations (who can rely on a dominant partner to provide the necessary co-ordination to form a CSG) and financial services and insurance companies, who were concerned that an inability for one member to control a CSG was too restrictive and would prevent corporate groups from using them.

HMRC have also confirmed that organisations can hold membership of more than one CSG, and that they have no objection in principle to cross-border CSG membership and supplies.

Next Steps

Exempt businesses should begin to plan for CSGs if they have not done so already. 

There are numerous issues that they will face in doing so:

  • The type of legal entity to use;
  • The choice of ownership and control of that entity;
  • Agreements between members regarding its day to day operation in practice;
  • Transfers of assets and secondment or transfer of employees to the CSG; and
  • Financing and cash flow.

Technical legal advice will also be required on certain aspects of the Exemption, such as how a "distortion of competition" is to be assessed, and whether transfer pricing rules would apply where one member of a CSG has dominant control of it.


The introduction of the Exemption is a step in the right direction for organisations carrying on exempt and non-business activities, who will now have to wait for the further regulations and guidance that have been promised by HMRC to appear before assessing the extent to which the Exemption will benefit them. 

HMRC will seek further input from stakeholders during development of the regulations and guidance, and, given that they have shown a willingness to adapt their proposals for the Exemption within the confines of the Directive, readers are encouraged to become actively involved in this process, either directly or by commenting to your DWF contact. 

For more information, please do not hesitate to contact one of the team.

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

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