The Cost Sharing Exemption and VAT Groups

This commentary arises from the decision of the CJEU in the case of Kaplan (C-77/19)The decision precedes the end of the Transition Period, and is thus binding precedent, save to the extent that this can be overridden by senior courts of the UK.  This means, essentially, that the decision sets the applicable rule unless and until it is specifically revoked by a senior court or by a change in legislation.

The case involved an international supplies dimension (which the CJEU did not answer, since its answer to the other point rendered it otiose), and one that has application to entirely UK sited entities.  The latter question fell into two parts, as follows:

  1. Can a cost sharing exemption vehicle (usually know as a CSG entity) make qualifying supplies to its members where all of those members are comprised in a VAT Group registration?
  2. Can this also apply where one or more members of the group registration are not members of the CSG?

The answer to the first question was that there was no bar to all members of the CSG also being members of the same VAT group.  Although grouping has the effect of creating only one taxable person, and therefore the CSG would appear, on that footing, to have only one member (which therefore would not comprise cost sharing), nonetheless the Court did not see this as overriding the purpose of the exemption for CSGs.

However, where the group registration contains one or more members that are not also members of the CSG, the fact that the grouping rules create a single indivisible taxable person does have an effect, since the services are not, then, provided by the CSG entity to one of its members.  The group registration has the effect of nullifying the membership status of the CSG for all its members.

Put more simply, where a CSG entity makes supplies to a VAT group wholly consisting of its members, then the exemption can apply (even if it has no other customers).  But where the VAT group does not wholly consist of CSG members, then it cannot apply.

In this case, the non-member of the CSG was the representative member of the group registration.  UK law explicitly provides that the representative member takes on the status of any member in respect of its purchases or sales, so as not to thwart the various reliefs.  But the Court decided that this aspect of UK legislation did not resolve the point, since it could not override any general EU principle.

The Court was clearly influenced by the risk that a VAT group could expand the ambit of the cost sharing exemption by means of acquiring exempt services that then would be used by the non-members of the CSG for non-qualifying purposes.  Whether this is genuinely the case is debatable, since the purpose of the exemption is only to exempt services that are used to make exempt supplies or for non-business activities.  However, that risk is cited in the decision.  That said, the decision is primarily based on the simple observation that a single taxable person (the VAT group) must be wholly a member of the CSG.

Whilst it would be tempting to think that arrangements could be made for all VAT group members to be members also of the CSG, this is not possible under the UK’s restrictive interpretation of the CSG rules.  To be a member of the CSG, a ‘person’ must either make exempt supplies or carry on outside scope activities.  In the context of a charity, therefore, the inclusion in a VAT group of, say, a subsidiary company that makes solely taxable supplies (such as running a merchandise selling operation), gives rise to an inability for the VAT group as a whole to enjoy the benefits of cost sharing.[1]  Whereas this can be solved by excluding such entities from the VAT group, this creates other issues, and further reduces the efficacy of the cost sharing exemption.  It also creates further reasons to resist the Treasury’s current floating of the possibility of making group registration compulsory.

That said, this is only relevant where a charity seeks to share services with other charities, and where the above VAT grouping issue arises.  The other problems with the cost sharing exemption have dissuaded many charities from using it at all.  So, the situations in which this decision will materially impact existing arrangements will probably be unusual, outside of the major education and housing groups.

The wider point that it makes, however, is that the cost sharing exemption has always been hopelessly inadequate to the needs of charities, and that the surfacing of yet another barrier to implementation shows that this relief has suffered the death of a thousand cuts.  Indeed, it is difficult to see it surviving, in its present form, for very long after 2020.

[1] (An alternative view is that the reference to ‘person’ in the UK legislation means (inter alia) to a ‘taxable person’, thus rendering the VAT group as a whole as a qualifying person.  But this seems circular, in the context of the CJEU’s decision.)

Graham Elliott is Technical Adviser to the Charity Tax Group

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