Organisations such as charities, universities, colleges, housing associations, finance and insurance institutions may benefit from a much needed cash boost as a result of the news that the VAT cost sharing exemption will be implemented into UK legislation without the limitations in its scope as previously proposed.

Baker Tilly analysis and detail

The proposed UK legislation is drafted in broad and general terms and a number of questions remain unresolved. HMRC is still developing comprehensive guidance.

One of the main concerns raised during the consultation period was that the definition of ‘independent group of persons’ appeared too narrowly construed and would have excluded the possibility that a Cost Sharing Group could be controlled by one of its members. This would have led to particular difficulties where a charity, housing association etc. might contribute the overwhelming majority of resources to the Cost Sharing Group, but would have had to relinquish control of these assets. Although not defined within the Draft Finance Bill, HMRC has stated that one member will be able to control the Cost Sharing Group but there must be a separate legal entity which will provide services to members of the Cost Sharing group. This relaxation by HMRC is welcome and is an incentive for organisations to seriously consider the VAT benefits created by cost sharing.

The ‘control’ issue may however give rise to a conflict between the need for a Cost Sharing Group to recognise an arm’s length return to meet transfer pricing obligations and to recognise a direct reimbursement of costs to meet the terms of the exemption. However, it is possible that suitable structures could be adopted to manage the transfer pricing issues.

Still to be determined however is the VAT treatment of ‘contributions’ of staff and other resources by members to the Cost Sharing Group. As the cost sharing exemption requires the exact reimbursement of costs, we would question whether members would be able to benefit from any efficiency savings if ‘contributions’ by members to the Cost Sharing Group would be considered as ‘externally supplied services’ and subject to VAT.

This VAT would be irrecoverable by the Cost Sharing Group and would significantly dilute the overall VAT benefits. There also remain unanswered questions from a direct tax perspective on whether such ‘supplies’ to the Cost Sharing Group by a member with charitable status may be deemed ‘non-primary’ trading, thus exposing the charity to direct tax and removal of its charitable status.

Much remains to be clarified and may well be addressed by the proposed detailed guidance and/or secondary legislation.