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HMRC Changes Position On VAT On Cost-Sharing Groups

by Jason Gorringe,, London

22 March 2018

The UK tax agency, HM Revenue and Customs, has released new guidance on its policies concerning cost-sharing groups following rulings from the European Court of Justice on their VAT treatment.

It has released Revenue and Customs Brief 3 (2018) and VAT Information Sheet 02/18.

Article 132(1)(f) of the EU VAT Directive (2006/112) provides an additional exemption for certain activities that are in the public interest. The exemption allows persons who carry on these activities to join together to form a cost share group (CSG) so that they can acquire services and recharge their members for their use of the services at cost without incurring any additional sticking VAT.

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 is created – a term coined by the EU Commission. Because 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 assets on their own account to benefit from the same overall VAT position as larger providers who can afford to purchase the assets themselves. Therefore, the more members of a CSG there are, the greater the potential savings and lower the costs per member of operating the relevant CSG.

In UK law, the exemption is reproduced in Item 1 of Group 16 to Schedule 9 of the VAT Act 1994. There has previously been some uncertainty over what exactly the exemption was intended to cover, HMRC explained, but this has now been clarified by the European Court of Justice.

The discussed cases are:

  • Commission v. Luxembourg (Case C-274/15)
  • Polish Finance Ministry v. Aviva Towarzystwo Ubezpieczen na Zycie S.A. w Warszawie (Case C-605/15)
  • DNB Banka AS (DNB) v. Estonia's state tax administration (Case C-326/15)
  • Commission v. Germany (Case C-616/15)

Specifically, 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 Brief 3 (2018), which discusses the judgments' impact in greater depth.

According to the VAT information sheet, the practical, 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 March 22 (the date on which the brief was released):

  • 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 activities are unaffected by this change, HMRC said.

There'll be interim measures for existing CSGs that have operated the previous guidance correctly. 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 apply the 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, HMRC said.

(c) A CSE won't be 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 any other case where exact reimbursement can't be evidenced.

TAGS: court | Finance | VAT tax authority guidance | VAT special schemes | tax | business | value added tax (VAT) | interest | law | Estonia | Luxembourg | United Kingdom | tax authority | transfer pricing | Germany | charities | trade | services | VAT case law | VAT refunds | Education | Europe | Education

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