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VAT: Cost Sharing Exemption – First Reported VAT Case

The first VAT Tribunal case regarding the cost sharing exemption, West of Scotland Colleges Partnership (“WOSCOP”) [2014] UKFTT 622 (TC), has now been reported and we thought it timely to raise the issue for twoGroup reasons:

  • there is little HMRC guidance on how to achieve the exemption available, making organisations unsure of how to implement it within their procurement arrangements; and,
  • whilst certain sectors or types of entity/business have established a cost-sharing arrangement, the cost sharing exemption provisions would still appear to be “under the radar” of many organisations who are potentially eligible to benefit.

The cost sharing exemption is not only beneficial in situations involving the centralisation and sharing of costs for “not for profit”/social sector organisations, it is equally applicable to commercial organisations with low or nil VAT recovery rates for business purposes, e.g. from partly exempt organisations such as in the financial and insurance sectors to independent/private schools. The arrangements could be of benefit not only financially, but also in terms of time/administrative costs, where eligible costs (n.b. only on services and not on goods) are shared.

In the WOSCOP case, the taxpayer was ultimately unsuccessful due to the basis of the cost allocation between its members being deemed insufficiently accurate/exact. This is one of the six conditions for operating a Cost Sharing Group (“CSG”), which are as follows:

  • there must be an independent group (i.e. the CSG cannot be controlled by one or several members);
  • members of the CSG must have VAT exempt or non-business activities (or can have both);
  • the services supplied by the CSG must be “directly necessary” for the members to make those exempt or non-business activities;
  • the services must be supplied to the CSG members at cost (i.e. no additional charge or profit must be made);
  • the supply must not give rise to a distortion of competition; and,
  • (an additional rule introduced by HMRC), apart from having exempt or non-business activities, a member must also receive a qualifying service which is exempt ( as defined within Group 16 of Schedule 9 to the VAT Act 1994), i.e. an onward charged commercially outsourced service cannot be provided by a CSG to its members.

Why Would I Want a Cost Sharing Group? 

If you cannot recover VAT but incur VAT on labour-intensive costs, this may be of benefit to you. Whilst the CSG cannot register for VAT and so cannot recover VAT on costs, the services supplied by the CSG to its members can be exempted from VAT, if all of the conditions apply. This means that where the costs incurred themselves are exempt, such as staff salaries, or zero-rated, such as food products, a clear benefit arises. In addition there may also be a benefit for organisations using outsourced services, such as IT, accounting, legal, catering services, etc., and where a number of organisations (although not necessarily a large number) need the same type of service.

The benefit to partly exempt businesses and to organisations with heavily VAT exempt or non-business activities would be to receive labour-intensive services free of VAT, thus keeping costs down by 20%.

Should you wish to discuss the above, please contact Marianne Hawksworth on +44 (0)1962 735350 or your regular TVC contact.


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