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Updated HMRC guidance on the cost-sharing exemption

*Update*: HMRC has since published Revenue and Customs Brief 10 (2018) which explains changes to HMRC’s policy following legal judgments and the impact on the test for directly necessary services, which enables cost sharing groups to ignore certain non-qualifying supplies for the CSE.

Revenue and Customs Brief 3 (2018): changes to the VAT exemption for cost sharing groups and the related VAT Information Sheet 02/18 explain the immediate changes that are taking place in HMRC’s policy following recent judgments in the 4 cases:

  • Commission v Luxembourg – Case C 274/15
  • Aviva Towarzystwo Ubezpieczeń na Życie S.A. w Warszawie (Aviva) – Case C 605/15
  • DNB Banka AS (DNB) – Case C 326/15
  • Commission v Germany – Case C 616/15

It also explains other matters and tells you about other areas that are under review and that may change later. This brief should be read by existing cost sharing groups (CSGs) in conjunction with VAT Information Sheet 02/18. The VAT information sheet explains what transitional arrangements are in force for CSGs that have applied the exemption correctly based on earlier guidance. It also explains where current guidance is amended by this brief.

The immediate effects of the judgments are as follows.

(a) The CSE will be restricted to members who engage in the exempt activities in the following Exemption Groups in Schedule 9 of the VAT Act 1994, with effect from the date of issue of this brief.

Exemption groups:

  • postal service (Group 3)
  • education (Group 6)
  • health and welfare (Group 7)
  • subscriptions to trade unions and professional bodies (Group 9)
  • sport (Group 10)
  • fund raising by charities (Group 12)
  • cultural services (Group 13)

The judgments don’t cover non-business activities and therefore CSGs engaged in these activities are unaffected by this change.

There’ll be interim measures for existing CSGs that have operated the previous guidance correctly.

Housing associations can continue to apply the CSE for the time being until HMRC gives more guidance.

In any case of avoidance or abuse, HMRC will apply the guidance from the court from the date of the judgments.

(b) HMRC policy will be amended to restrict the CSE to members located in the UK. It’ll no longer be permitted to apply the exemption for transactions with members located in other EU member states. The CSE has not been permitted for members located outside of the EU, and this will remain the position.

(c) A CSE won’t be permitted where an uplift has been charged on transactions for transfer pricing purposes. It’ll remain the position that the CSE won’t be permitted in any other case where exact reimbursement can’t be evidenced.

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