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Driving down overhead costs in Charity Management – Is the VAT Cost Sharing Group a further option?

31.07.2014

With the announcement of a jobs review at the Royal Voluntary Service following on from recent similar news from The Princes Trust and back office functions merging between the RNIB and Action for Blind People clearly further avenues are being explored across the third sector in managing overhead costs. So what role could VAT play in cost reduction?

Obviously effective VAT management on securing zero or reduced VAT rates on relevant costs a charity incurs is important to ensure. What other strategic VAT tools are out there which could influence the way in which services are delivered by bodies exposed to irrecoverable VAT?

Partial Exemption Methods are certainly a core strategic tool but what of the use of the VAT Cost Sharing Group Exemption?

Despite the introduction of the VAT Cost Sharing Group Exemption in 2012 I’m still not seeing much discussion to date on whether this VAT exemption relief is one that is being explored across not just the charity sector but other sectors where it could be of value such as housing associations, colleges and universities, local authorities or any sector where non business activities or VAT Exempt income abounds.

Whilst it was a much heralded change in VAT treatment I must admit that when you look at the detail you have to recognise that, with the conditions to meet, it will take a material level of activity to be involved to produce realistic VAT benefits. But if we consider the restructuring plans across public sector bodies and social care areas - I do think it needs to be added to the agenda for strategic discussions.

What is the Cost Sharing Group (CSG) in the VAT context – its legislation which allows a recharge for services to be made from one body (you might think of it as the shared service centre) to other legal entities, who are “members” of that shared service centre body, to be made without VAT having to be added to that charge.

In the past where, say, a housing association had acquired building repair services from another housing association rather than employ its own maintenance team, then that service charge would have created taxable business income for the supplier body, contributed to the need to be VAT registered or if the supplier was VAT registered, have meant that the receiving association would incur a VAT charge on the labour element of that repair job which it wouldn’t have incurred if using its own employed labour to undertake the repair.

As the VAT charged by the one association to the other would not be recoverable by the client association it created a real disincentive to collaborating or sharing services. So the Cost Sharing Group Exemption removes that VAT charge and makes the recharge from the shared service centre to its members VAT exempt rather than taxable.

However, as usual there is a BUT - To take advantage of that VAT relief on the recharge a range of conditions need to be met:

  • HMRC’s definition of an “independent group of persons” – the cost sharing group company needs to be a separate legal entity from its member bodies.
  • All members of the arrangement must carry on exempt or non-business activities
  • HMRC’s definition of the supplies made which qualify for the VAT exemption treatment – there is a simplification rule here which is helpful but will require some audit control to ensure compliance.
  • Direct re imbursement of costs condition – covers how the recharge needs to be calculated
  • Distortion of competition condition

Charge for services to be made from one body (you might think of it as the shared service centre) to other legal entities, who are “members” of that shared service centre body, to be made without VAT having to be added to that charge.

In the past where, say, a housing association had acquired building repair services from another housing association rather than employ its own maintenance team, then that service charge would have created taxable business income for the supplier body, contributed to the need to be VAT registered or if the supplier was VAT registered, have meant that the receiving association would incur a VAT charge on the labour element of that repair job which it wouldn’t have incurred if using its own employed labour to undertake the repair.

As the VAT charged by the one association to the other would not be recoverable by the client association it created a real disincentive to collaborating or sharing services. So the Cost Sharing Group Exemption removes that VAT charge and makes the recharge from the shared service centre to its members VAT exempt rather than taxable.

However, as usual there is a BUT - To take advantage of that VAT relief on the recharge a range of conditions need to be met:

  • HMRC’s definition of an “independent group of persons” – the cost sharing group company needs to be a separate legal entity from its member bodies.
  • All members of the arrangement must carry on exempt or non-business activities
  • HMRC’s definition of the supplies made which qualify for the VAT exemption treatment – there is a simplification rule here which is helpful but will require some audit control to ensure compliance.
  • Direct re imbursement of costs condition – covers how the recharge needs to be calculated
  • Distortion of competition condition

The CSG VAT option may not be viable for small scale collaborations across third sector, public sector and education bodies but I would encourage Chief Executives and Operational Directors of any organisation where VAT recovery is a concern, just to make sure the opportunity is talked through when looking at wider schemes of collaboration on service delivery, back offices functions etc. which would engage with other VAT sensitive bodies.

Commentary provided by Liz Maher, Director of Centurion VAT Specialists Ltd, a six strong team of VAT experts based in Newport and Bristol and the 2013 winner of Taxation’s Best VAT Team in the UK award. Centurion is the largest independent VAT specialist team based in Wales and supports a wide range of sectors including those in the third sector.

Contact Centurion on: emailus@centurionvat.com or www.centurionvat.com

Tel 01633 415390/01179200135

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