HMRC has announced changes to the UK's VAT rules relating to cost sharing groups (CSGs) following recent judgments from the Court of Justice of the European Union. The changes mean the VAT exemption for CSGs will now only apply to entities providing certain public interest services listed in the VAT Directive, such as postal, education, and health services. Banking and insurance entities are no longer eligible. HMRC will also restrict CSG membership to UK entities and require recharges to members be made only at cost. Entities correctly applying previous guidance have until the end of May 2018 to comply with the new rules.

1. © 2018 Grant Thornton UK LLP. All rights reserved.
Grant Thornton’ refers to the brand under which the Grant Thornton member firms provide assurance, tax and advisory services to their clients and/or refers to one or more member firms, as
the context requires. Grant Thornton UK LLP is a member firm of Grant Thornton International Ltd (GTIL).GTIL and the member firms are not a worldwide partnership. GTIL and its member
firms are not agents of, and do not obligate, one another and are not liable for one another’s acts or omissions. This publication has been prepared only as a guide. No responsibility can be
accepted by us for loss occasioned to any person acting or refraining from acting as a result of any material in this publication.
Contact
VAT alert
HMRC announces VAT changes for Cost Sharing Groups
March 2018
Summary
HMRC has announced important
changes to the UK’s VAT rules
relating to the operation of cost
sharing groups. The changes follow
a number of recent judgments from
the Court of Justice that have
clarified how the VAT exemption for
such groups is to be applied by
Member States.
Revenue & Customs Brief 03/2018
sets out the details of the changes
and VAT Information Sheet 02/2018
sets out HMRC’s view on the impact
of its change of policy.
It took the UK almost 35 years to
enact the mandatory VAT exemption
for cost sharing groups. The law
came into force in July 2012 and, In
essence, it entitles entities that make
VAT exempt supplies to form a cost
sharing group which, in turn, can
exempt supplies of services to its
constituent members.
A cost sharing group can provide a
substantial VAT saving for member
entities as, in most cases, the
members are not entitled to reclaim
VAT incurred on costs due to the
exempt nature of their own particular
activities.
Revenue & Customs Brief 03/2018 and Information Sheet 02/2018
Recent judgments issued by the Court of Justice of the European Union (CJEU),
HMRC have clarified the circumstances in which the VAT exemption for cost
sharing groups (CSG) can be applied.
The exemption introduced in 2012, allows businesses with VAT exempt activities to
reduce VAT costs when they decide to work together to for example gain
efficiencies. When the exemption was introduced, HMRC made it clear that there
was uncertainty as to its scope and that their original approach could be modified
based on future litigation. Following the judgment of the CJEU in the cases of DNB
Banka AS (Case C-616/15) and Aviva S.A. (Case C-605/16), their policy is to be
revised. The CJEU judgments surprisingly made it clear that the exemption is
restricted to those entities whose supplies are exempt from VAT under the
provisions of Article 132 of the VAT Directive. This Article exempts supplies of
goods and services that are, or are deemed to be, activities in the public interest..
Unfortunately, banking and insurance activities are not included in this list and, as
a result these entities are now precluded from forming CSG’s.
With immediate effect, the UK’s CSG exemption will, as a consequence, apply only
to entities that operate in the postal services, education, health and welfare, trade
union / professional bodies, sport, fund raising (by charities) and cultural services
sectors. Housing associations although not in this list have been allowed to
continue to use CSG’s at least for the time being. In addition, HMRC will restrict
membership to entities located in the UK and will strictly enforce the condition that
recharges to members by the CSG must only be at cost.
Although the policy changes have immediate effect, HMRC has stated that, where
entities have applied the existing published guidance correctly, they will be entitled
to continue operating under that regime until the end of May 2018. HMRC have
further warned that they may introduce further changes to restrict the types of
services that can be exempted by the CSG.
Comment – HMRC’ will welcome the judgments of the CJEU as it enables
them to greatly restrict the scope of the exemption. The announcement of a
change of policy was expected albeit, perhaps, not as speedily as has
happened. All members of an existing CSG will need to review its operation
and consider whether they are affected by the changes.
Stuart Brodie
Scotland
T +44 (0)14 1223 0683
E stuart.brodie@uk.gt.com
Karen Robb
London & South East
T +44 (0)20 772 82556
E karen.robb@uk.gt.com
Vinny McCullagh
London & South East
T +44 (0)20 7383 5100
E vinny.mccullagh@uk.gt.com