UK guidance on cost sharing groups’ VAT exemption

Tue 28th Jan 2014

The UK’s HMRC has updated its guidance for costs sharing groups which wish to take advantage of the potential VAT exemption on inter-group transactions.

VAT exempt groups

The VAT exemption relief is offered where two or more companies with UK VAT exempt activities form a new company to provide shared services.  The service company is then able to supply its services to its founders VAT free (exempt).  The idea is to simplify the compliance arrangements, and encourage companies to seek efficiencies that would otherwise be lost because of their VAT exempt status.  It is important that the services are directly related to the VAT exempt activities of the founders.

The most common use of the cost savings groups is in VAT exempt financial services (e.g. banks and insurance companies), but they are also used by charities.

Updated guidance on VAT exemption

The new guidance clarifies the entitlement and use of the exemption, and covers the following areas:

  • Types of organisations entitled to the exemption
  • VAT exempt supplies that may be considered for the exemption
  • 5 rules that HMRC use to judge an exemption applications
  • The legal structures used for cost sharing groups
  • Compliance procedures for members of the group
  • How to treat exempt and non-exempt activities within the group