After a long delay HMRC has finally issued its consultation on how the cost sharing exemption, that is permitted under Article 132(1)(f) of the EU VAT Directive, could be introduced into UK legislation. Colin Laidlaw explains.

Several charities may collectively decide to outsource their front/back office activities to one entity that centrally performs these functions on behalf of all involved.  The benefit being that cost savings can be made by economies of scale. However, currently recharges of the costs to the individual entities involved would be subject to VAT, if the entities are not in the same VAT group.

This VAT charge is likely to be an additional cost where it relates to the exempt or non business activities carried out by the entities and therefore any possible cost saving of centralising staff, admin, IT etc may be negated.

Cost sharing exemption

It is expected that the cost sharing exemption will help charities and entities carrying out exempt or non business activities to reduce the VAT incurred on shared costs.

Interpreting the EU Directive, HMRC has stated that there are five conditions to be met before the cost sharing exemption would apply as detailed below: