Cost sharing exemption

Following a consultation by HMRC over the summer and an announcement in the Chancellor's Autumn Statement, HMRC has today published the proposed legislation to implement the cost sharing exemption.

What does this mean?

The cost sharing exemption will allow businesses and organisations which are independent of each other and that have exempt and/or non-business activities, to set up 'cost sharing groups' to provide services to each other without charging VAT. This is expected to benefit organisations such as charities, academy schools, universities, higher education colleges and housing associations.

The main conditions as contained in the draft legislation are as follows:

  • the members of the cost sharing group must each be engaged in exempt or non-taxable activities;
  • the supply is made for and directly necessary for those activities;
  • the group only claims from its members exact reimbursement for those services; and
  • the cost sharing arrangement is not likely to cause distortion of competition.

The introduction of the cost sharing exemption is welcome and is expected to result in cost savings from economies of scale for educational bodies, charities and housing associations exceeding £100m (in addition to any VAT savings). However, the conditions for the exemption may limit the services which qualify under the exemption.

What should you do?

Cost sharing groups can apply the exemption from the date when the Finance Bill receives Royal Assent in 2012, although HMRC has acknowledged that it cannot prevent cost sharing arrangements from being formed prior to the new legislation coming into force because the exemption already exists under EU law.

HMRC has said it will publish comprehensive guidance on the conditions and eligibility in due course. However, in the meantime, any businesses and organisations who believe they may benefit from the cost sharing exemption may wish to speak to us for further details.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.