Posted by admin - July 14, 2014 2:52 pm
VAT Cost Sharing Exemption
What is VAT Cost Sharing Exemption?
Not for profit organisation are constantly looking for ways to keep costs to a minimum in order to maximise the funds that can be used to further their charitable objects. To this end collaborative working within the not for profit sector is on the increase. When looking at ways in which to share services such entities should be aware that a Cost Share Group Exemption was introduced into UK VAT legislation in the Finance Bill 2012.
Under normal circumstances if an organisation supplies services to another organisation the provision of such services will be standard rated and in many instances an entity making exempt supplies or with non business activities will not be able to reclaim all of the VAT on such transactions.
Cost Share Group Exemption
The Cost Share Group Exemption applies when two or more organisations (whether businesses or otherwise) with exempt and/or non-business activities join together on a co-operative basis to form a separate, independent entity known as a cost sharing group (CSG).
The CSG will then either incur costs and/or employ staff to enable it to supply services to the members. The supply of these services will be exempt from VAT where supplied to the members.
These supplies must be ‘directly necessary’ for the exempt and/or non-business supplies made by the individual qualifying member.
To qualify for the exemption the following conditions must be met:
- The cost sharing group must be independent.
- Members of a cost sharing group must make exempt and/or non – taxable supplies.
- Supplies by the cost sharing group to its members must be at cost.
- The services supplied by the group to its members must be ‘directly necessary’ for the
members’ exempt and/or non – taxable supplies. - Cost sharing, using the exemption must not cause a distortion of competition.
An example where the exemption could be used would be a number of not for profit entities working together sharing a Head Office/Finance function. Recharges of such administrative services between such entities would ordinarily lead to one of the entities suffering irrecoverable VAT. By setting up a CSG this cost could be avoided.
There are of course costs associated with having a separate legal entity and these would need to be weighed up against the savings in respect of irrecoverable VAT.
If you would like to discuss this or a related issue in more detail, please contact Clair Rayner on 01795 479111 or clair.rayner@mfw.co.uk.
