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HMRC internal manual

VAT Cost Sharing Exemption Manual

How the conditions are to be interpreted: Directly Necessary services: How does the 85% “directly necessary” test work? (guidance effective until 14 August 2018)

A member receiving supplies from the CSG of which they are a member will have to:

  • have made 85 per cent or more exempt and/or non-business supplies in the immediately preceding 12 months or completed partial exemption year end prior to their membership of a CSG (the backward look); or
  • have a intention in the 12 months immediately following joining a CSG to make 85 per cent or more exempt and/or non-business supplies (the forward look)

Once this test has been met the qualifying member will be entitled to receive all of their supplies from the CSG exempt for as long as their level of exempt and/or non-business supplies remains at 85 per cent or more.

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.