Very broadly speaking, the UK and EU cost sharing legislation enables exempt/partly exempt organisations to manage their VAT cost on back office services by setting up a separate 'cost sharing vehicle' (CSV). Subject to some arguably, fairly stringent conditions being met, the supply of 'back office' services by the CSV will be exempt.
By way of Revenue & Customs Brief 03/18 and Information Sheet 02/18 (both issued on 22 March 2018), HMRC have announced that financial service (FS) providers are to be excluded from the list of organisations which may rely on this legislation – thus leaving the legislation available only to organisations such as charities and not for profit organisations.
FS providers which are already using a CSV to make back office supplies may continue to exempt these supplies up to and including 31 May. However, FS providers which have not yet made any supplies from a CSV may not now start to exempt these.
Despite HMRC’s relatively broad interpretation of the cost sharing legislation, FS providers have frequently struggled to benefit from it -with only a handful of CSV projects having gone to implementation stage; among other things, the requirement that services can only be recharged at cost has created tensions with transfer pricing requirements, the back office services to which the exemption applies is often narrower than realistically, is required, and a sufficient cost benefit is generally only achievable for larger organisations.
Thus, relatively few providers will be affected by the above announcement. In addition, for those that are affected, it is worth bearing in mind that there is not necessarily any urgency to 'unwind' the CSV itself; it is rather the case that supplies made by the CSV will not qualify for exemption after 31 May 2018, and therefore the urgency is around managing the VAT cost which will arise because of such supplies becoming standard rated.
It is worth finishing with a couple of concluding thoughts on the wider implications of the above announcement:
- Up until the announcement on the cost sharing legislation, there seemed to be a good chance that any cull on UK VAT legislation which is more 'generous' than its EU 'parent' legislation will be parked until after Brexit – an example being the long-awaited narrowing of the somewhat generous VAT intermediary insurance legislation. Now it seems that we need to be more wary about taking such a view, and build possible changes into any forecasting.
- Finally, with or without the existence of the cost sharing legislation, there are a number of very effective VAT cost management strategies which can be implemented – ranging from the use of different vehicles, to restructuring supplies which are received. Businesses should therefore continue to consider which strategy is most appropriate to their activities and needs.