VAT – UK treatment of cost-sharing arrangements

A European Economic Interest Grouping (‘EEIG’) is a form of business entity set up as a co-operative venture under the provisions of EC Council Regulation 2137/85 by enterprises of two or more Member States. Ann was approached by the UK member of a French EEIG and asked to prepare a detailed submission to HMRC setting out the case for exemption of the services supplied to them under what was, in effect, a cost-sharing arrangement.

The argument was that, although not implemented in UK law, article 13A(1)(f) of the Sixth Directive was of direct effect in the UK and exempted this type of supply. The project involved an analysis of article 13A(1)(f) and the principle of direct effect, research into the other language versions of the provision in the directive and the position in other Member States, and consideration of the possibility of a claim for damages under the Factortame principle.

Update (at June 2014)

Article 13A(1)(f) of the Sixth Directive became article 132(1)(f) of Directive 2006/12/EEC. The wording was slightly changed. Poland has joined the member states who have implemented the exemption in article 132(1)(f). Germany has been the subject of infraction proceedings by the Commission because of the limited scope of its implementation of the provision (restricting it to the medical and healthcare sector).

Section 197(2) of the Finance Act 2012 inserted a new Group 16 in Schedule 9 VATA exempting certain cost-sharing arrangements from 17 July 2012.

Defeat for College in first VAT case to consider cost sharing groups

Under the rules in new Group 16 VATA only the members’ individual share of the expenses can be recovered from them by the cost-sharing group.  In other words, there must not be a profit element in the pricing of the services. This proved problematic in the West of Scotland Colleges Partnership case decided by the First-tier tribunal in June 2014.  The colleges lost their appeal as they did not reimburse the cost-sharing group the precise amount of their respective costs. Instead costs were simply pooled and shared equally, despite the colleges being of varying sizes and offering different courses.  Exemption was therefore denied.

At the time of publication this case study was technically accurate however, as tax law and practice change rapidly, you should take specific advice before taking any action.