This is a freeview 'At a glance' guide to the VAT costs sharing exemption. 

Charities, universities, colleges and housing associations can share costs without triggering a VAT charge by forming a Cost Sharing Group (CSG) under the cost sharing exemption.

The exemption is mandatory and was introduced into UK law with effect from 17 July 2012. Prior to that it still applied to UK business, by virtue of the Principal VAT Directive (PVD), Article 132(1) (f) and its predecessor, the Sixth Directive.

  • This exempts the cost sharing of services from VAT.
  • The exemption is intended to be used by organisations such as charities, universities, higher education colleges and housing associations wanting to make efficiency savings by working together to achieve economies of scale.

Qualifying conditions

The following conditions apply:

  • The CSG must be independent.
  • Members of a CSG must make exempt and/or non-taxable supplies. The services must be 'public interest activities' (see recent developments below).
  • Supplies by the CSG to its members must be at cost.
    • CSGs will not be allowed where an uplift is charged/required on transactions for transfer pricing purposes.
  • The services supplied by the CSG to its members must be ‘directly necessary’ for the members’ exempt and/or non-taxable supplies.
  • Cost sharing, using the exemption, must not cause a distortion of competition.
  • From 22 March 2018, the exemption can only apply to public interest activities.

Recent developments

1 Restriction to public interest activities only

Following the decision of the Court of Justice of the European Union (CJEU) in DNB Banka (C-326/15) and Aviva Towarzystwo (C-605/15) on 21 September 2017, which confirmed that the exemption can only apply to 'public interest activities', HMRC have published a Policy Paper and Information Sheet confirming the additional conditions that must be met.

From 22 March 2018 onward the following changes are made to the CSG:

  • The CSG will be restricted to UK members only:
  • Those members must engage in exempt activities that fall within one of the following Schedule 9 VAT Act 1994 groups:
    • Postal services (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)
  • Housing associations could continue to rely on the old guidance whilst HMRC considered how the CJEU decision impacted them: see below.
  • CSGs engaged in non-business activities were unaffected by the CJEU judgement and therefore are not affected by these changes.

Transitional rules

Existing UK CSGs with UK members, were allowed to rely on the previous guidance until 31 May 2018, except in cases where there was likely to be a distortion of competion or tax avoidance.

  • Any services invoiced or paid before 31 May 2018, can only benefit from the exemption if those services are performed before 31 May 2018.
  • If not all performed by 31 May 2018, a reasonable apportionment will be required.
  • HMRC are inviting those CSGs who forsee significant difficulties in applying the new rules within the timeframe allowed, should contact HMRC by 1 May 2018.

Existing CSGs with UK and other EU members may be allowed to rely on the transitional rules above if all the below conditions are met:

  • The CSG is not located in the UK, but in another EU member state.
  • The CSG implemented the exemption in accordance with HMRC's old guidance, where different to the member state in which it is located.
  • The CSG can demonstrate to HMRC that there is no distortion of competion.
  • These CSGs should write to HMRC by 1 May 2018.

Housing associations

Following the CJEU decision, HMRC published Revenue & Customs Brief 8 (2019) to explain HMRC's conclusions following its review of the application of the CSE to the social housing sector.

The Brief confirms that the CSE can apply to the social housing sector, where conditions are met: 

  • There must be no uplift of internal or external costs (for example, resulting in a margin or profit on actual costs being recharged) within the CSG.
  • There must be no uplift of the costs being shared within any VAT group including either, the CSG itself, and or the members of the CSG.
  • There must be no uplift of costs by a VAT group member supplying a CSG in the same VAT group.
  • There must be more than one member of the CSG, the count does not include members that are in a VAT group either with the CSG, or with other members.
  • The CSG only applies to providers of social housing (registered social landlords) and not to private housing providers.

2 Changes to directly necessary condition

Until 14 August 2018 HMRC applied an 85% rule:

  • If a member of a CSG has exempt or non-business activities which form 85% or more of their total activities, all the supplies received from the CSG are deemed to be directly necessary for the exempt or non-business activities.

Following the DNB Bank case, from 15 August, HMRC have withdrawn the 85% rule (subject to transitional arrangments):

  • The phrase "directly necessary services" will include:
    • Services that are directly necessary for the CSG member's relevant exempt and/or non-business activities, and
    • Any overheads that are directly necessary, but only partly used, in those activities, but only to the extent that they are so used.
  • Where directly necessary services are attributable to both taxable and exempt or non-business activities, an apportionment will now be required based on the use of the costs by the CSG member.
  • HMRC will normally accept the CSG member's Partial exemption recovery percentage for the apportionment, though the CSG may suggest alternatives to HMRC which will be considered as long as they give a fair and reasonable result.
  • The CSG will need to retain sufficient records to show how the apportionment has been calculated.

Transitional rules

  • Existing CSGs that had been correctly applying the 85% test could continue to do so until 31 December 2018.
  • Services invoiced or paid pre 31 December 2018 only benefit from the transitional arrangements to the extent they're performed before that date.
  • Prepayments covering before and after the transition date, needed to be reasonably apportioned.
  • The transitional arrangements cannot be used or relied on in cases of tax avoidance, or where there is likely to be a distortion of competition.

External links

VAT Cost Sharing Exemption Manual

Revenue and Customs Brief 23 (2012): Guidance on Cost Share Group Exemption

Revenue and Customs Brief 3 (2018): changes to the VAT exemption for cost sharing groups

Revenue and Customs Brief 10 (2018): VAT - cost share exemption

Revenue and Customs Brief 8 (2019): review of the VAT exemption for cost sharing groups in the social housing sector


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