Direct delivery

Charities and social enterprises have welcomed the news that the government has finally made progress towards implementing the EU VAT exemption for not-for-profit organisations' sharing services. This creates real opportunities for organisations seeking to save costs and achieve their aims more effectively by collaborating to share common services. But there are still some significant hurdles and uncertainties to address.

For many years charities, social housing providers and other not-for-profit organisations have eyed jealously their EU counterparts whose countries have carried into domestic law article 132(1)(f) of the Principal VAT Directive (A131PDA) enabling them to share services without incurring VAT. The same exemption is now to be available in the UK to cost sharing groups (CSGs) whose members carry out activities that are either exempt from VAT or classed as 'non-business' activities.

The government has finally bowed to pressure from charities, providers of social housing and residential care homes, and the Treasury estimates that there will be £125m VAT savings by 2016/17 with further efficiency savings through sharing services of a further £100m. The main eligible organisations will include charities, registered providers of housing, health and social care organisations, higher and further education institutions, banks and insurance companies. The government has confirmed that legislation will be introduced (in the Finance Bill 2012) to implement A131PDA.

This will be done by exempting from VAT the supply of services by an independent cost sharing group (CSG), which meets the following conditions. The draft legislation sets out the main attributes needed to benefit from the VAT exemption, which are:

• each member of the CSG must carry out either exempt or non-taxable activities;
• the services supplied to them must be made for and be 'directly necessary' to those activities;
• the CSG must claim exact reimbursement only for those services; and
• this VAT relief must not cause distortion of competition.

Separate corporate entity

A key element of the draft legislation is that CSGs must be a separate corporate entity and any organisation wanting to receive services from the CSG must become a member of it. Control of the CSG does not have to be shared equally between its members. Previous proposals (from HMRC) that no one member could have a majority interest in the CSG have been relaxed. This means that the CSG can be controlled by one of its members and the other members simply hold a minority interest in order to benefit from the shared services.

The proposals have been welcomed by representatives of those sectors that could benefit, including the Charity Tax Group and the Charity Finance Directors' Group. There is still some concern that the financial and administrative burden of setting up a new corporate entity to act as the CSG may act as a barrier to smaller organisations seeking to take advantage of the new exemption. It had been hoped that the exemption could be extended to CSGs established as contractual joint ventures. This would have been of significant interest to smaller organisations including the many smaller charities collaborating to deliver services in fields such as health and social care. Such organisations may now have to explore the possibility of becoming a member of a CSG established by a larger, better resourced, organisation.

Back-office services

During the previous 2011 consultation, respondents suggested they could use a CSG for a range of back-office services such as admin, payroll, HR, IT, finance and internal audit. There is no express exclusion of these services from the exemption but there is some uncertainty about whether these services are 'directly necessary' for the provision of VAT exempt services and whether there would be any distortion of competition (particularly with the private sector). Crucially for the many organisations, the sharing of frontline services seems more straightforward.

Reimbursement only

To avoid abuse of the exemption, the proposals include a requirement that, to claim the exemption, there can only be the recovery of exact costs from the arrangements. However, this exemption is a helpful tool for organisations seeking to collaborate in order to efficiently deliver more effective services.

The draft legislation is open for 'technical comment' until 10 February 2012 and will be included (as revised, if appropriate) in the Finance Bill 2012, which will be published in late March (after the budget). We expect the detailed draft guidance and regulations setting out the detail of the exemption to be published by HMRC around the same time.