The Cost Sharing Exemption

The cost-sharing exemption is a new facility introduced by HMRC designed to assist organisations that cannot fully recover VAT, perhaps due to the VAT exempt supplies they make.

It is likely to be rarely required or used in connection with academies, as schools and colleges can generally find easier ways to avoid irrecoverable VAT.

However, it may be of assistance on occasion, perhaps when VAT on the cross-charges made for shared staff resources between entities (not within a MAT) mean that some irrecoverable VAT is created that would not have arisen if the costs had been incurred directly by each party.

The cost sharing exemption does not apply to the purchase and sale of goods, only to shared services.

The rules give a new category of VAT exempt transaction for:

The supply of services by an independent group of persons where each of the following conditions is satisfied —

(a) each of those persons is a person who is carrying on an activity (“the relevant activity”) which is exempt from VAT or in relation to which the person is not a taxable person within the meaning of Article 9 of Council Directive 2006/112/EC

(b) the supply of services is made for the purpose of rendering the members of the group the services directly necessary for the exercise of the relevant activity,

(c) the group merely claims from its members exact reimbursement of their share of the joint expenses, and

(d) the exemption of the supply is not likely to cause distortion of competition.

It is important to note is that an “independent group” is mentioned, which HMRC have interpreted to require a formal entity, a cost sharing group (CSG), to be created for the purpose of sharing the services between the members of the CSG. This needs to be a separately identifiable entity, such as a formal partnership or company, and not simply an agreement between, say, academy A and academy B that the costs of a particular service will be shared between themselves. In effect the service needs to be purchased by the new CSG entity and then supplied as a second step to the members (academy A and academy B, for example).

Technical & Reference Material

VAT Act 1994, Schedule 9, Group 16 gives the exemption, which is derived from the EU Directive 2006/112. It came into effect from 17 July 2012.

• HMRC Cost Sharing Exemption (CSE) Manual
• HMRC “Supply and Consideration” Manual VATSC06000