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VAT: Cost Sharing Exemption - CIOT comments

The CIOT comments, sent to HMRC on 27 September 2011, on a possible model for a cost sharing exemption that might be introduced in the UK. The consultation also asks specific questions to enable HM Revenue & Customs to assess the impact of implementing the exemption.

Last year, the Government announced its intention to implement the exemption for cost sharing arrangements provided for in article 132(1)(f) of the Principal VAT Directive (PVD). The exemption is mandatory and must be implemented by member states. In the past, HMRC have announced a consultation on the implementation of the cost sharing exemption and we are seeking input from members on the consultation which can be accessed on HMRC’s website at:


The cost sharing exemption was originally drafted in very narrow terms and applied solely to certain services such as medical and dental services. It was intended to allow medical practitioners, whose services are mainly exempt from VAT, to allow them to share costs that are not subject to VAT, such as salaries, without creating a VAT cost on them. In the absence of such a measure, the sharing of costs such as salaries, rent (unless opted) and other expenditure not subject to VAT would result in a VAT cost substantially increasing the VAT cost. The increase in cost could potentially deter cost sharing and the potential efficiencies arising therefrom.

Before the Sixth VAT Directive was adopted, the restrictions on the exemption were removed. The exemption now applies to:

(f) the supply of services by independent groups of persons, who are carrying on an activity which is exempt from VAT or in relation to which they are not taxable persons, for the purpose of rendering their members the services directly necessary for the exercise of that activity, where those groups merely claim from their members exact reimbursement of their share of the joint expenses, provided that such exemption is not likely to cause distortion of competition;

According to the consultation paper, the exemption is likely to apply to cost sharing by:

  • Charities;
  • Universities and Further Education Colleges;
  • Housing Associations;
  • Residential care homes;
  • Banks; and
  • Insurance companies.

However, it is possible that it might apply to other bodies. HMRC are keen to draft legislation that is straightforward to implement but at the same time does not assist avoidance or evasion but admit that the conditions for exemption are complex. Given that the exemption is mandatory, there may need to be compromises.

The exemption has been implemented in a myriad of ways in other member states and has also been implemented in some non-EU member states such as Canada. There is therefore no clear guidance from other countries on how to implement the exemption.


The consultation raises the following issues:

a. Definition of terms in the exemption (highlighted above):

  • How do you define the term ‘independent group of persons’?
  • The exemption applies to exempt and non-taxable activity – does this need to be defined?
  • What does the term ‘directly necessary’ [for the purposes of rendering services] mean?
  • What is meant by ‘exact reimbursement’ of costs?
  • How do you determine whether there is distortion of competition?

b. What compliance and process issues arise?

However, there are other issues. For example, HMRC agree that in principle the exemption should apply to the sharing of services across borders. This may raise not only VAT issues but also issues such as are there any transfer pricing issues that might arise?

HMRC also appear to think that the exemption does not apply to cost sharing by individuals that are undertaking non-economic activities. However, the PVD refers only to ‘activity’ and not ‘economic activity’ so it may be that the proposals are too narrow. For example, it is possible that the exemption could apply to the owners of flats or apartments who contribute towards the costs of maintaining the common parts of the property.

Technical Team

27 September 2011


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