VAT’s the way to do it
Landlords could make big savings under the new cost sharing exemption, says Neil Cohen, professional support lawyer at Trowers & Hamlins
The possibility of social landlords being able to save potentially large amounts of value added tax took a step closer last month.
HM Revenue & Customs finally published guidance on what is known as the cost sharing exemption. This is an exemption from VAT on the supply of services from an entity (say, a company) to its members (such as the shareholders of that company). Provided certain conditions are met, the payment for those services is free of VAT (whereas it would generally pay VAT to a normal external supplier of such services).
This opens up the possibility of saving VAT on the labour element of previously outsourced services.
Rules of exemption
The conditions for the exemption (all of which must be satisfied) are as follows:
- the shared service provider must be part of an independent group of persons which supplies services to its members (HMRC refers to the service provider as a ‘cost-sharing group’);
- all CSG members must carry on an activity that is at least partly exempt from VAT or not a business activity for VAT purposes;
- the services supplied by the CSG must be ‘directly necessary’ for a member’s exempt and/or non-business activity;
- the CSG must not make a profit on its exempt supplies;
- the application of the exemption is not likely to cause a distortion of competition.
Although these conditions are deceptively simple, HMRC has given much thought to how they should be applied. This has involved a consultation and much head-scratching. However, now that the guidance has been released, social landlords can move ahead with VAT-free cost sharing with confidence.
The guidance is detailed, running to 25 pages. Some of the highlights are: it is possible to be a member of more than one CSG (this is good news, allowing for the possibility of specialist CSGs); if a member of a CSG does not receive qualifying supplies for a period of 12 months, it will have to leave the CSG unless it can show an intention to receive such supplies in the ‘near future’.
There is much else besides, and landlords wishing to move ahead with cost sharing will need to familiarise themselves with the guidance.
The potential VAT savings can be significant, for example, the elimination of VAT on labour costs for repairs and maintenance to rented stock, or to care accommodation.
In certain cases, VAT costs in relation to previously outsourced ‘back office’ services might be eliminated. It is, of course, entirely up to housing providers to decide which services they feel can be shared in this way, taking into account confidentiality and other commercial issues.