The VAT cost-sharing exemption (CSE) was formally enshrined in the UK legislation in 2012.
The aim of the legislation is to ensure that where VAT averse entities (eg those in the education and social housing sectors) choose to share resources by outsourcing certain central services, VAT does not become a disincentive.
The rules operate by the creation of a cost-sharing group (CSG) run by and for the benefit of its members. A CSG will typically provide services such as IT, HR, procurement and other similar ‘back-office’ services to its members on a VAT-exempt basis.
The West of Scotland Colleges Partnership (WOSCOP) case is the first example of this legislation being tested at Tribunal and provides an important insight into the challenges to be met in successfully implementing the CSE.
Unfortunately for the colleges in question, their appeal failed and the tribunal found that their CSG had not met the requirements for exemption.
The decision makes clear that the conditions attaching to the CSE must be interpreted strictly. To be effective, a CSG must abide by the letter of the law – not just its spirit.
There are five key requirements which must all be met if the cost sharing exemption is to have effect:
1. The CSG must be a separate entity from the members
2. All members must carry out VAT exempt activities
3. The services supplied by the CSG must be ‘directly necessary’ for the members to carry out their exempt activities
4. The application of the VAT exemption to the CSG’s services must not result in distortion of competition
5. The CSG must recover from its members only their share of costs. Pricing of the CSG’s services must not include a profit element.
In the WOSCOP case, the CSG failed on condition number 5. The reason was that the CSG simply recharged each of the members an equal share of the costs with no attempt being made to identify and recharge the precise costs incurred by each individual member.
The case is a very important reminder of how challenging it can be to ensure that your organisation benefits in practice from legislative provisions which are in principle designed to provide relief from VAT. If you are considering forming a CSG, these provisions will require detailed analysis and extremely careful implementation in order to ensure that the conditions for relief are satisfied.
The CSE is very much alive – but the WOSCOP case highlights the need to proceed with caution.