An update on the VAT exemption for cost sharing

Deloitte update on recent court cases that could impact the availability of cost sharing exemption in the housing sector.

5 July 2017

As outlined in our previous article, the VAT exemption for cost sharing (CSE) has been subject to considerable scrutiny in the European courts with questions likely to be resolved soon as to whether it can be applied in the housing sector at all. 

In the meantime, another recent case has raised questions as to whether it can apply where the cost sharing relates not just to VAT exempt/non-business activities but to taxable activities as well. Following our previous update regarding whether the CSE can be applied in the housing sector, and contrasting AG opinions from the European Court on this point, the Court of Justice of the European Union (CJEU) has now released its judgment in EC v Luxembourg, regarding the activities of members of a cost sharing group (CSG).

Services supplied by a CSG to its members can be exempt from VAT where those services are ‘directly necessary’ for the non-taxable activities of the members. The UK accepts that as long as the services are used at least 85% for such activities, the exempt can apply.

The Luxembourg had interpreted this test as being automatically satisfied where members' exempt turnover was more than 70% of their totals. However, the CJEU found that this threshold was not compatible with the EU VAT Directive, and appears to restrict the exemption to those instances where the CSG’s services are used solely for exempt or non-business activities.  

The CJEU’s confirmation that a CSG should be treated as an entity that is separate from its members is unsurprising. However, the rejection of the Luxembourg de minimis threshold may have an impact in other Member States, including the UK’s 15% threshold. As yet, HMRC have not released any statement or comment on the case.

This is likely because further full judgements are expected from the CJEU in the DNB Banka and Aviva cases over the next few months, which will further determine how the CSE should be applied.

In the meantime, we would recommend that any housing associations applying, or considering the application of, the CSE carefully consider the likely impact of developments in this area.