Finance Act 2012 has introduced from 17 July 2012 the new group 16 to Schedule 9 to the VAT Act 1994 which deals primarily with the Cost Sharing Exemption provision.
The 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, a cost sharing group (CSG), to supply themselves with certain services at cost and exempt from VAT. As a result a ‘cooperative self-supply’ arrangement (a term the EU Commission use) is created.
The exemption applies to supplies of certain qualifying services that are made by the representative member of the CSG to other members of the CSG. These supplies can include ancillary goods only must be ‘directly necessary’ for the exempt and/or non-business supplies made by the individual qualifying member.
The CSG is a separate taxable person from that of its members. It is therefore able to make supplies for VAT purposes to its members. These supplies will be exempt if the relevant conditions are met. This type of arrangement enables the creation of the same economies of scale for smaller businesses and organisations as larger businesses and organisations naturally enjoy. Thus the more members of a CSG there are the greater the potential savings and lower the costs per member of operating the relevant CSG.
The cost sharing exemption which is mandatory applies only in very specific circumstances and will not cover all shared service arrangements.
There are five conditions attached to the exemption:
- There must be an ‘independent group of persons’ (a CSG) supplying services to persons who are its ‘members’.
- All the members must carry on an activity that is exempt from VAT or one which is not a business activity for VAT purposes.
- The services supplied by the CSG, to which the exemption applies, must be ‘directly necessary’ for a member’s exempt and/or non-business activity.
- d) The CSG only recovers, from its members, the members’ individual share of the expenses incurred by the CSG in making the exempt supplies to its members.
- The application of the exemption to the supplies made by the CSG to its members is not likely to cause a distortion of competition.
All these conditions have to be satisfied for a supply to be exempt.
If any of the conditions are not met the supplies will be taxable.