VAT Cost Sharing Exemption

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George Carr
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1 VAT Cost Sharing Exemption HMRC announcement Millions to be slashed from housing association annual VAT bills Contact: Team: John Butler Finance Policy Tel: Date: December 2011 Ref: FP.FI.2011.BR.06 Registered office address National Housing Federation, Lion Court, 25 Procter Street, London WC1V 6NY Page 1

2 Introduction You will recall that HM Treasury (the Treasury) and HM Revenue and Customs (HMRC) consulted on the VAT Cost Sharing Exemption over the summer. The consultation ended on 30 September We are pleased to confirm that on 6 December 2011, the Treasury published clauses in the draft Finance Bill that will pave the way for the introduction of the exemption in the UK by the summer of Although detail on the exemption is scant in the draft legislation, it will be subject to a further period of consultation. However, HMRC will continue to work with interested parties, including representatives from the housing association sector, to produce detailed regulations setting out how the exemption will operate. HMRC has also issued an Information Sheet which includes a question and answer section on some of the key features of the proposed exemptions. The Q&A also describes the possibility for back-dating the exemption by up to four years from the date the exemption becomes effective. Where applicable the exemption should remove the VAT barrier that prevents housing associations from working together to reduce their costs and increase their effectiveness. A number of housing associations provided information to the Federation that helped inform our response to the consultation. We wish to express our gratitude to all those associations that contributed to achieving this positive outcome. To access a copy of the Federation s response, follow the link: se.aspx To review details of the draft Finance Bill clauses, the Information Sheet on the VAT Cost Sharing Exemption and the Consultation Responses Document, follow the link: Page 2

3 1.0 Background The Federation warmly welcomes Government s move to implement the VAT Cost Sharing Exemption in the UK as this should remove the VAT barrier to collaborative working that many housing associations across the sector seek to achieve efficiency gains. A number of housing associations are already engaged in cost sharing arrangements but under current UK VAT regulations, these are not tax efficient and consequently, have been relatively limited in their scope. The Federation and KPMG, the Federation s tax advisors, have been campaigning for the introduction of this exemption for a number of years and began working with the Treasury and HMRC last year, during the preconsultation phase. Prior to formal consultation, the Treasury and HMRC had excluded expenditure on back-office services such as administration, IT, payroll, etc. from the scope of the proposed exemption. However, during pre-consultation, the Federation and KPMG argued for the inclusion of back-office services. Back-office services have now been included. Similarly, in the consultation document it was proposed that an independent, separately constituted Cost Sharing Group (CSG) would need to be at the hub of eligible structures. Critically, the Treasury and HMRC stipulated that no one CSG member could control the CSG. Throughout the autumn, the Federation and KPMG hosted a series of VAT cost sharing workshops for members around the country at which the Treasury and HMRC explained the proposals and listened to the sector s concerns. Virtually as a single voice, the sector emphasised that the proposed criteria for CSGs were too stringent to be of any practical use. Because of the potential for cost sharing within the sector, it was unsurprising that an impressive 35 organisations from the sector responded to the consultation - second in number only to the further and higher education sectors. Housing association responses explained how the creation of separate, jointly-controlled entities would be overly burdensome for the sector and not cost effective. Concerns expressed centred around staffing issues (such as transferring staff into a jointly controlled entity) and the lack of control housing associations investing significant resources would be able to exert over CSGs. We are pleased to confirm that the Treasury and HMRC have responded positively to some of the concerns raised by the sector. However, as we make clear below, some of the current VAT Cost Sharing Exemption proposals are still onerous and the sector will need to work closely with HMRC to ensure that the VAT Cost Sharing Exemption regulations are sufficiently flexible to ensure that housing associations are able to take full advantage of the exemption. Page 3

4 2.0 Revised proposals The main amendments to the proposals are: 1. Independent group of persons whilst HMRC still require any CSG to be a separate legal entity distinct from its members, one member can control the CSG or have a majority interest in the CSG 2. Organisations can only join a CSG if at least five percent of their activity is either exempt and/or non-business activity 3. Directly necessary test - members with 85 per cent exempt and/or nonbusiness activity can receive all services supplied by the CSG free of [exempt from] VAT. HMRC will provide more detailed guidance about how members may enter or leave a CSG if they do not currently meet the entry requirement, or breach them whilst in the CSG and 4. Exact reimburesement and distortion of competition rules are to be applied broadly in line with what was described in the consulation document. This means that a CSG may build up cash balances as a reserve or as a contingency fund as long as any surplus is held for the future use of the CSG. The definition of a CSG above stops short of the cost sharing contracts driving the exemption that the Federation had advocated. However, the revised CSG definition allows for a single housing association to exert majority control over the CSG, which should be sufficient to allow more widespread implementation of the exemption across the sector. It may be particuarly attractive to those housing associations seeking to invest the lion s share of resources in a CSG. Most social housing providers are likely to be eligible to join a CSG as the level of their exempt and/or non-business activity will typically exceed the five percent threshold. More significantly, the level of exempt and/or non-business activity for many housing associations exceed the all important 85% of total activity. At this level a housing association in a CSG will be eligible to receive all services supplied by the CSG exempt from VAT, subject to other conditions being met. HMRC s Information Sheet issued with the draft Finance Bill clauses (Question 3 and 4), confirms that existing CSGs that meet the legal conditions for exemption and have always applied these conditions before the implementation date, may be able to back-date the exemption by upto four years. Page 4

5 3.0 Next steps The Treasury and HMRC will be collating responses to the draft Finance Bill and will finalise the Finance Bill ready for the March 2012 Budget Statement. HMRC will work with interested parties, including representatives from the housing association sector to produce detailed guidance setting out how the exemption is intended to operate. The Federation will continue to work with HMRC to ensure that the social housing sector gets an opportunity to influence the process and to shape the detailed regulations. The Federation will be canvassing housing associations to inform the debate and we are keen to hear your views on these issue. The Federation and KPMG will host workshop(s) in the New Year as part of this exercise details to follow. More specifically, the Federation will be contacting directly the other 34 organisations from the sector that responded to the consultation exercise. Contacts for this issue are: 1) Parul Anand, KPMG, ) National Housing Federation John Butler Joseph Carr Page 5

VAT Cost Sharing Exemption

VAT Cost Sharing Exemption HMRC Consultation Housing associations have a real opportunity to save millions Contact: Team: John Butler Finance Policy Tel: 0207 067 1177 Email: john.butler@housing.org.uk