KPMG, representing the National Housing Federation, met with HM Revenue & Customs to discuss the application of the CSE and common questions. The meeting considered all the conditions that must be satisfied for the CSE to apply and some of the frequently asked questions. Points of note from the meeting include:
Where a Cost Sharing Group (CSG) member is also a member of the same VAT Group as the CSG then any supplies of services made by the CSG member to the CSG must be at cost and cannot include any mark up/profit element as this will ultimately not equate to an “exact reimbursement” of cost as in such circumstances there will be a profit element that is being charged onto other CSG members outside the VAT Group. The cost can include:
- Direct costs of the service of the CSG (e.g. materials and labour)
- Overheads of the CSG (e.g. legal costs in connection with setting up the CSG, HR cost of managing the staff performing the CSG’s service etc.) Where it is difficult to calculate an exact amount for overheads in advance of services being provided, the costs may be estimated using management account projections with a subsequent quarterly or half-yearly reconciliation to actual costs. This should satisfy the ‘exact reimbursement’ requirement.
In addition to precluding CSG members from making a profit from the CSG’s activities, ‘exact reimbursement’ also means that they cannot make a loss from its activities and therefore all associated costs should be incorporated.
- If non-members of the CSG that are also VAT grouped with the CSG provide the CSG with a supply then HMRC consider that, unless the supply that they provide to the CSG is at cost, there may well be a distortion of competition with a hidden profit being made by the VAT Group.
- If CSG members but non-VAT group members provide the CSG with services then the value of any charge should also not exceed cost.
- If non-CSG and non-VAT group members provide the CSG with services then the normal VAT rules apply.
- A CSG can run a surplus but only if it is preparing for a specific future liability (e.g. a capital item or a pension provision) and that the members have agreed to provide for. There must be a clear audit trail to show that the funds/surpluses are fully utilised for the purposes of the specific provision that was made and that any surpluses are refunded to the CSG members and any losses are fully covered by the members. In the event that the future liability doesn’t materialise or is less than predicted then there should be scope to return the contingency surplus to the members.
- Although a CSG can provide more than one type of service, it can only charge and incorporate in the cost of the charge to each member the cost of the services that support that member’s exempt or non-business activities.
- The volume of supplies to different CSG members can be significantly different but the charge to each should reflect their use of qualifying services.
- HMRC are wary, as a result of infraction proceedings involving other Member States, of drawing the scope of the exemption too widely.
It is clear that some uncertainty remains in connection with whether and how the CSE will operate in all scenarios but further practical examples and discussion of the practicalities should help to address outstanding points.
A version of this article appeared in the National Housing Federation’s Finance Policy Quarterly Update in January 2013.