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HMRC internal manual

VAT Cost Sharing Exemption Manual

How the conditions are to be interpreted: Directly Necessary services: What are ‘directly necessary’ services? (guidance effective until 14 August 2018)

Article 132(1)(f) requires that supplies made by CSGs to their members must be ‘directly necessary’ for their exempt and/or non-business activities. If they are not, the exemption does not apply and the supplies are subject to normal VAT rules.

The word ‘necessary’ used alone could be interpreted on the basis that any supplies used for a CSG member’s exempt and/or non-business activity would be entitled to exemption. However, the word ‘necessary’ is, in this case, qualified by the use of the word ‘directly’ meaning that the supplies received from the CSG must relate ‘directly’ to the exempt and/or non-business supplies made by the CSG member in their own right.

If CSGs wish to suggest alternative methodologies HMRC will give them full consideration but must be satisfied that there is a direct and exclusive link with the exempt or non-business activity on which the qualification depends.

The treatment of ‘directly necessary’ services is currently under review following the CJEU judgment in Commission v Luxembourg (case C-274/15).  When that Review has been completed, HMRC will announce any changes to take effect going forward.