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HMRC internal manual

VAT Cost Sharing Exemption Manual

How the conditions are to be interpreted: Direct Reimbursement of Costs: If the direct tax transfer pricing rules apply will they preclude use of the exemption as affected transactions may not comply with the 'exact reimbursement of costs' rule?

No. HMRC accept that pricing or repricing transactions under direct tax transfer pricing rules will not preclude use of the exemption.

However, if the actual pricing of the charge by the CSG to its members exceeds an arm’s length figure, such transactions would not qualify for the exemption.

Where a CSG has both unconnected and connected members for transfer pricing purposes, regardless of the tax position of the connected members, the unconnected members will still have to receive qualifying supplies without a margin or mark-up to meet this condition and to benefit from the exemption.

Please note: a Transfer Pricing Adjustment is not in itself a supply nor consideration for a supply. It is an indication that transactions or arrangements may not have been undertaken at an ‘arms length’ price. It may therefore point to an under valuation of the underlying supply for VAT purposes. Further information regarding Transfer Pricing and VAT can be found in VAT Guidance, V1-12: Valuation.