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HMRC internal manual

VAT Cost Sharing Exemption Manual

Introduction: What are the conditions of the exemption?

There are five conditions attached to the exemption.

  1. There must be an ‘independent group of persons’ (a CSG) supplying services to persons who are its ‘members’.
  2. All the members must carry on an activity that is exempt from VAT or one which is not a business activity for VAT purposes.
  3. The services supplied by the CSG, to which the exemption applies, must be ‘directly necessary’ for a member’s exempt and/or non-business activity.
  4. The CSG only recovers, from its members, the members’ individual share of the expenses incurred by the CSG in making the exempt supplies to its members.
  5. The application of the exemption to the supplies made by the CSG to its members is not likely to cause a distortion of competition.

All these conditions have to be satisfied for a supply to be exempt.

If any of the conditions are not met the supplies will be taxable.

Further details and how these conditions are to be applied are covered in more detail in this guidance. However it should be noted that the EU Commission are currently infracting a number of Member States in relation to how they have applied the exemption and the outcome of those infraction proceedings could impact on how HM Revenue & Customs (HMRC) currently view the operation of the exemption, as explained in this guidance. HMRC will monitor these infractions and consider whether or not any changes are necessary to the guidance. Should changes prove to be necessary, then transitional arrangements, as far as possible, will be put in place to facilitate an orderly move to the revised position.