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VAT rule & Brexit muddy waters for cost sharing

29 September 2017 • Jo Loake

A recent decision made by the European Court of Justice (ECJ) may mean that the VAT exemption on Cost Sharing Groups will no longer apply to housing associations, but the prospect of Brexit muddies the waters somewhat.

A number of housing associations have created cost sharing groups (CSG) as a means of saving VAT on services provided between members of the CSG. This has been a valuable exercise for housing associations in budgetary terms, allowing the savings to be used to meet the rent cut gap, or continue to develop.

Background to the decision

By way of background, legislation was enacted to introduce VAT exemption for services supplied by a cost sharing group to its members. The exemption applies provided that the following conditions are met:

  • There is an independent group of persons supplying services to its members
  • The members must carry on activities which are exempt from VAT or one which is not a business activity for VAT purposes
  • The supplies by the cost sharing group must be directly necessary for a member’s exempt or non-business activity
  • The cost sharing group only recovers the members’ individual share of costs
  • The application of the exemption is not likely to cause a distortion of competition

Exemptions are set out in EU VAT law in two Articles, Article 132 and 135. The ECJ’s decisions results in the exemption under Article 135, which housing associations rely upon, no longer rendering the services between CSG members as exempt just because they provide exempt services under Article 135.

The recent decisions mean that the VAT exemption does not apply to housing associations under EU VAT law, as it appears to restrict the exemption to circumstances where the CSG’s services are used solely for exempt or non-business activities. This would exclude most housing associations.

The UK position

However, UK VAT legislation lists all exemptions together, as opposed to in separate Articles and so continues to allow exemption for cost sharing groups without the restrictions caused by the ECJ decision.

Usually the UK would amend the UK VAT law in line with this ECJ’s decision, but given the possibility of the UK leaving the EU, this is uncertain, therefore current and potential members of cost sharing groups may wish to provide for a potential VAT assessment.

The ECJ did however make it clear that where a cost sharing group had relied UK VAT law to exempt its services, the principle of legal certainty does not allow for HMRC to go back and assess for VAT retrospectively.

Our advice

Clearly, there needs to be some clarity from HMRC. We would advise any RPs looking to set up a Cost Sharing Group to wait until we know more about the UK tax position going forwards before they advance their plans in any great detail.


If you would like further advice on this please contact our Head of Governance and Regulation, Jo Savage.

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