Although not widely used across the industry, VAT cost sharing structures operate as a valuable VAT cost reduction tool for financial services firms - particularly when combined with other VAT cost reduction mechanisms.
However, following the recent judgment in the DNB Banka case, HMRC has announced that financial services businesses will be precluded from utilising the Cost Sharing Exemption (CSE).
HMRC has confirmed that it will allow a transitional period till the end of May 2018 at which point the CSE will no longer be available for use by financial services organisations.
There is a relatively short time scale in which to consider alternative procurement arrangements which may manage the VAT cost which will be incurred following the withdrawal of the exemption to such vehicles.
Financial Services VAT Partner John Forth said: ‘This decision was widely anticipated, but it will nevertheless be a blow for those financial services firms that have legitimately taken advantage of the benefits of the VAT cost sharing model.
‘The recent DNB Banka decision confirmed that the cost sharing exemption should only be available for organisations which are broadly acting in the public interest. HMRC has previously expressed concern that financial services businesses may seek to exploit the cost sharing exemption and it is probable that this would have been withdrawn for the financial services sector post Brexit anyway.
‘However, this serves as a warning that other announcements and changes to financial services VAT legislation which we thought would probably not happen pre-Brexit, may be closer than we think.
‘While it does constitute a setback, the announcement from HMRC is a reminder that that there are effective options available to financial services providers to manage the VAT burden they suffer and they should continue to focus on ensuring that arrangements are structured as efficiently as possible.’