Clarifying the scope of the cost-sharing exemption
31 January 2017
It is common for many businesses to come together and pool resources as a means of sharing these resources amongst the group, or even as a means of saving money when procuring services externally. However, for those entities which make exempt or partially exempt supplies, the VAT incurred on procuring such services remains an irrecoverable cost. It is with the aim of alleviating this issue that the mandatory cost-sharing exemption was introduced.
The cost-sharing exemption is found in Article 132(1)(f) of the Principal VAT Directive (the “PVD”) and was implemented in the UK with the inclusion of Group 16 of Schedule 9 to the Value Added Tax Act 1994 in 2012. The provisions exempt from VAT supplies made by a group which consists of entities engaged in exempt or non-taxable activities, when those supplies are made to the group members at cost for the purpose of their own exempt or non-taxable activities. Put simply, the VAT cost for exempt or partially exempt businesses is removed when certain conditions are met.
Since its introduction, the cost-sharing exemption and its application have been the source of considerable debate and activity. With references currently before the Court of Justice of the European Union (“CJEU”) in respect of the cost-sharing exemption, and the latest reference having been heard by the CJEU in December 2016, the importance of the exemption could not be better highlighted.
As it stands, the CJEU is considering a number of significant questions which go to the very heart of how the exemption is to be applied and understood. These questions include whether the cost-sharing exemption can apply in a cross-border setting, whether a cost-sharing group must be a separate legal entity (both in (Case C-326/15 DNB Banka) and what the nature of the concept of “distortion of competition” requires when applied to a cost-sharing group (Case C-605/15 Aviva). Infraction proceedings against Luxembourg and Germany for their application of the cost-sharing exemption serve to further complicate the picture. It therefore remains to be seen whether the CJEU will give the exemption a restrictive or broad interpretation.
The focus of the debate in the UK has so far been on the guidance issued by HMRC and the approach HMRC have been taking when it comes to those who are seeking to apply the exemption.
Underscoring all of the above is of course the issue of Brexit. From a VAT perspective at least, the indication that the UK is likely to be leaving the single market brings to play a myriad of possibilities. In terms of the cost-sharing exemption, what will the UK decide to do with this and will HMRC maintain their current approach? Will the UK even continue to operate a VAT system? Although some of the possibilities are more likely than others, the answer to such questions is as yet unknown.
Notwithstanding the uncertainties around Brexit, given the likely period of time before the UK leaves the EU, questions will continue to arise on the exact scope of the cost-sharing exemption in the meantime. The guidance of the CJEU in the live references is therefore eagerly anticipated.