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HMRC internal manual

VAT Cost Sharing Exemption Manual

How the conditions are to be interpreted: Directly Necessary services: How can the test be applied in practice? (guidance effective until 14 August 2018)

HMRC will accept any calculation method that produces a fair and reasonable result.

This can be done in a number of ways. For example, as members in these circumstances will be making taxable as well as exempt and/or non-business supplies they are likely to be VAT registered, partially exempt and be completing monthly or quarterly VAT returns. Their ongoing VAT return, partial exemption and, if appropriate, their business/non-business calculations could be used to determine whether or not the test has been met. Businesses and organisations that are not VAT registered could, for example, use data from their management accounts to determine whether they meet the test or not, on a monthly or quarterly basis.

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 forwar