United Kingdom - VAT cost sharing exemption 

• The exemption will allow partly or fully exempt businesses to receive certain services free of VAT.
• The exemption will allow insurers to pool their resources to secure VAT-efficient economies of scale.

A corporate group can also take advantage of the exemption and establish its own cost sharing entity. This will be of particular interest in cross-border situations when it is often not possible to mitigate VAT costs through VAT grouping. The cost sharing entity can also join a VAT group.

Cost sharing exemption criteria

The UK has “cut-and-pasted” the exact wording of the underlying European law into UK law and has released detailed guidance as to how it ought to be interpreted. The guidance states that, for the exemption to apply, the following tests (which have to be applied on a supply-by-supply basis) must be met:

• There must a separate person / entity that provides services to its members (being its shareholders or similar).
• All members must conduct at least 5% exempt or non-business activities.
• The cost sharing entity’s services must be “directly necessary” for the use by the members in their own exempt and/or non-business activity.
• The cost sharing entity must only recover an individual share of the expenses from its members.
• The application of the exemption may not produce a distortion of competition.

KPMG observation

Insurers may want to consider their business models and the circumstances in which the exemption could be applied, and work through the potential challenges and uncertainty concerning the interpretation of HM Revenue and Customs’ guidance. In implementing such a structure, it would be prudent to consider the potential tensions between the cost sharing and transfer pricing requirements.

Read a February 2013 report prepared by the KPMG member firm in the United Kingdom: Introduction of a VAT cost sharing exemption into UK law