Landlords could save millions by pooling resources under new rules, says Oliver Sharp
The Finance Bill 2012 is introducing an exemption from VAT for services supplied within a cost sharing group, the members of which carry out exempt or non-business activities. The legislation will be introduced once the bill receives royal assent (anticipated in July) and will be very relevant for the social housing sector.
The current position is that social landlords pay 20 per cent VAT on certain services they receive. Where organisations wished to achieve efficiency savings through collaboration, this VAT cost has often been cited as a barrier to such collaboration. Forming a CSG (within the requirements of the new law) may offer efficiencies and could also help reduce this VAT cost.
Increasingly, organisations are seeking to work together to create efficiencies and add value by pooling resources. If they do so by forming a CSG then the services supplied to its individual members will be exempt from VAT.
HM Revenue & Customs has estimated this exemption could facilitate £100 million in cost savings for businesses (excluding VAT savings), but there are conditions attached and these may not be easy to meet. For example, services supplied to members of the CSG must be ‘directly necessary’ for their exempt and/or non-business activities. HMRC is in the process of preparing detailed guidance - which is likely to be published in June.
Now is perhaps the appropriate time to weigh up the administrative and financial costs of setting up a CSG against the potential VAT and other savings that a social landlord could make by pooling resources, particularly for small and medium organisations.
Oliver Sharp is a senior associate at Lewis Silkin