The final Cost Sharing Exemption (CSE) guidance has arrived, released by HMRC on 24 August 2012. It has been a long time coming and provides organisations with a confirmed framework within which to more efficiently share services. Importantly, little has changed since the Draft Guidance. Therefore the models that we have developed with Registered Providers (RPs) and organisations from other sectors should meet the CSE requirements and allow organisations to efficiently share services.
Although the Cost Sharing Exemption has previously been available to UK organisations as a result of the entitlement to rely on EU legislation, the introduction of UK legislation and, more importantly, the UK guidance provides a framework within which organisations can now assess whether their arrangements will qualify for the exemption.
Without the CSE, if two or more RPs, or like-minded organisations from other sectors, set up a joint venture entity then any service provided by the joint venture to the RPs was likely to be subject to VAT at the standard rate to at least one of the joint venture members and create a VAT cost. By setting up a Cost Sharing Group (CSG) between RPs who can meet the qualifying member test (QMT), while supplies to the CSG will still be liable to VAT, the recharges of “directly necessary” services (not goods) at cost by the CSG to the members should be exempt from VAT. Therefore, the CSE has the potential to remove a significant element of the VAT cost associated with shared services. HMRC estimate that the CSE should reduce their VAT revenue by in excess of £100m per annum.
What are the key tests?
To satisfy the QMT, a member must have at least 5 percent exempt or non-business activities. From our experience, all RPs will satisfy this test. Additionally, for the services to benefit for the exemption they must meet the “directly necessary” test. To meet this, the member must either have operations that are at least 85 percent exempt or non-business in total or the service they receive must relate to a sector or activity of the RP for which the services are considered “directly necessary” that is at least 85 percent exempt or non-business. Again, from our experience the majority of RPs should satisfy this test.
What do we still need to know from HMRC?
Unfortunately, although there is a framework within which CSE models can be assessed, there remain several questions in connection with how they will operate in practice, including:
- What does HMRC mean by “the CSE will not apply to outsourced services”?
- What constitutes promotion and marketing that could lead to a distortion of competition?
- What constitutes inflated supplies into a CSG?
- The draft guidance makes the CSG responsible for ensuring that supplies to members qualify for the exemption. If a member ceases to qualify for exemption but does not disclose to the CSG, is the CSG or the individual member liable for errors that occur as a result?
How can RPs benefit?
The main benefit will come from the CSG becoming a member of a VAT group that will provide a service to the CSG. We are discussing models for the application of the CSE with organisations that could benefit.
We recommend that RPs consider the application of the CSE where:
- They already share services with other organisation.
- They tender for services that could be procured from another RP.
- They introduce a new service or activity that could be shared with other RPs.
- They are reviewing the Value for Money procurement of services and/or alternative procurement strategies.