How the conditions are to be interpreted: Directly Necessary services: How may ‘directly necessary’ services be identified?
HMRC will accept services are directly necessary if they are identified using the following methodology:
- 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.
- On an, optional, simplification basis, where a member of a CSG has wholly exempt and/or non-business activities or low levels of taxable activity, all the supplies they receive from a CSG will be regarded as ‘directly necessary’ for those exempt and/or non-business activities.
A low level of taxable activity for the purposes of this test is less than 15 per cent so, where a member of a CSG has exempt (CSE3660)and/or non-business activities that form 85 per cent or more of their total activities, all the supplies they receive from their CSG will be regarded as ‘directly necessary’.