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HMRC internal manual

VAT Cost Sharing Exemption Manual

How the conditions are to be interpreted: Directly Necessary services: What happens if a member fails the 85% test after initially meeting the test? (guidance effective until 14 August 2018)

If a member of a CSG is not able to meet the 85 per cent or more test, HMRC will not accept that all CSG supplies to that member are exempt but will accept exemption of supplies from their CSG which are ‘directly attributable’ (using partial exemption methodology) to that member’s exempt and/or non-business activities.

All the supplies made by the CSG will only become exempt once the member of the CSG is able to meet the 85 per cent test again.

If they fail to meet the test on the forward look, having used up their one forward look test, they will have to rely on the backward look to qualify again or the member may benefit from the exemption to the extent that the supplies from the CSG are ‘directly attributable’ (using partial exemption methodology) to their exempt and/or non-business activities.

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