CIOT: Exemption from VAT on shared costs must benefit charities and small business, say tax advisers
Friday, 30 September 2011 3:58 PM
A statement1 by an HMRC official that a VAT exemption for the provision of shared services by charities and other organisations will not cover back-office services is not correct, says the Chartered Institute of Taxation (CIOT).
An HMRC consultation on the VAT issues around ‘cost sharing’ ends today. Cost sharing takes place when a group of individuals, companies, charities or other bodies form another body (the cost sharing group, or CSG) that hires staff and acquires other resources in order to provide services to its members. The buying in of such services is VAT-liable – despite the fact that some or all of the services would not be VAT-liable if carried out in-house.
Stephen Coleclough, Vice President of the CIOT and President of the Confédération Fiscale Européenne, explained:
“We very much welcome the implementation of the exemption which will bring UK law into compliance with EU VAT law, but we are concerned that there are already attempts to limit its application, even before the consultation has concluded.
“Contrary to the reported view of an HMRC official that the exemption does not apply to ‘back office’ functions, our view is that the exemption is expressed in fairly liberal terms and, unlike other exemptions, does not allow Member States to define its application.”
The CIOT takes the view that all that is required for the exemption to apply is –
Those sharing costs must be members of a cost sharing group (CSG) and must use the services provided by the CSG for their exempt or non-taxable activities;
The goods and services provided must be charged at the cost to the CSG of procuring them – in other words the CSG will be a not for profit group;
The provision of services by the CSG should not lead to distortions in competition with third party providers of other service providers.
Stephen Coleclough continued:
“It is difficult to envisage any services that a business might outsource to a CSG that will not be directly necessary to the business of the group’s members. Even costs such as for accounting are directly necessary given that the business has to recover its costs from members.
“We will be asking HMRC to explain just what services of a CSG they do not see as qualifying for exemption.”
Notes to Editors
1. As reported by the Civil Society on 8 September 2011 – see http://www.civilsociety.co.uk/finance/news/content/10435/vat_cost-sharing_exemption_may_not_cover_back-office_services
2. Cost sharing refers to the situation in which a group of individuals, companies, charities or other bodies form another body (the CSG) that hires staff and acquires other resources in order to provide services to its members. Members are each charged their proportion of the cost incurred by the CSG. For example if A, B and C form a group and use the services 40% - A, 35% - B and 25% - C, the costs would be shared 40:35:25.
For example, suppose a number of charities get together to employ a number of people to raise funds for themselves. Under normal VAT rules, VAT would be due on the services of the CSG’s employees and its other costs. Since salaries are not normally subject to VAT, this adds 20% to the cost. The cost sharing exemption should permit the CSG to supply its services free of tax as Article 132(1)(f) of the Principal VAT Directive exempts the services provided by a CSG to its members from VAT provided that the services are rendered at cost.
The exemption applies to individuals, companies and certain other organisations provided that their activities are either exempt from VAT or are not within the charge to VAT. For example, in a case that came before the Court of Justice of Europe, a number of small insurance companies formed a CSG to run a claims handling service. The Court found that the exemption did apply to those services.
This exemption should have been introduced in UK law in 1978 but HMRC have argued that there was no demand for it and that it was implemented in other ways. Following the 2010 Budget, HMRC have been consulting on how it should comply with the UK’s obligation to implement it, which offers scope for charities and similar organisations to save on their VAT costs.
The exemption does not apply where the provision of the services would lead to distortion of competition.
HMRC envisage that the exemption will benefit a wide range of businesses including those in the finance, insurance, charity and education sectors.
3. The Chartered Institute of Taxation (CIOT) is a charity and the leading professional body in the United Kingdom concerned solely with taxation. The CIOT’s primary purpose is to promote education and study of the administration and practice of taxation. One of the key aims is to achieve a better, more efficient, tax system for all affected by it – taxpayers, advisers and the authorities.
The CIOT’s comments and recommendations on tax issues are made solely in order to achieve its primary purpose: it is politically neutral in its work. The CIOT will seek to draw on its members’ experience in private practice, government, commerce and industry and academia to argue and explain how public policy objectives (to the extent that these are clearly stated or can be discerned) can most effectively be achieved.
The CIOT’s 15,600 members have the practising title of ‘Chartered Tax Adviser’ and the designatory letters ‘CTA’.
4. The Confédération Fiscale Européenne is the body of European tax advisers, which embraces 33 national organisations from 24 European States, representing more than 180,000 tax advisers.
Newsletter sign up