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HMRC internal manual

VAT Cost Sharing Exemption Manual

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

Only supplies of services received from a CSG that can be ‘directly attributable’ (using partial exemption methodology) to the member’s exempt and/or non-business activities will be regarded as ‘directly necessary’ and therefore qualify for the exemption. Expenditure on services received from a CSG that is attributable to both taxable and exempt and/or non-business activities will not qualify as being ‘directly necessary’ as they are NOT linked exclusively to the exempt and/or non-business activities of CSG members and will consequently be subject to their normal VAT treatment.

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.