Latest information on the VAT cost sharing exemption

Deloitte explains how the housing sector is affected by the VAT exemption for cost sharing.

1 March 2018

Together with the Federation, Deloitte is engaging with HMRC policy to help ensure the housing sector can continue to benefit from the VAT exemption for cost sharing (CSE). This update follows our article from July 2017 on VAT exemption for cost sharing.

Recent decisions could affect your organisation

The Court of Justice of the European Union (CJEU) has adopted AG Kokott’s reasoning from the Aviva and DNB Banka cases, ruling that the CSE applies only to exemptions that are in the public interest (found in Article 132 of the Principal VAT Directive which includes education and healthcare activities). It will not apply to those in other sectors such as land/property and financial services (which are listed in Article 135 of the Principal VAT Directive).

In the European Commission v Germany case, the CJEU confirmed that the CSE was available to all public interest activities, not just healthcare.

We are aware of a number of organisations that have implemented, or are considering implementing, cost sharing groups in order to mitigate VAT costs – for example in respect of the costs of repairing and maintaining their housing stock.

As social housing cost sharing groups rely on the exemption for land and property contained in Article 135, the effect of the recent CJEU decisions – whilst unclear – could be to restrict the types of activities to which you could apply the CSE.  

We understand that a number of members have been following these developments, and some of you may already be in discussions with HMRC regarding the application of the cost sharing exemption to specific circumstances.

No retrospective consequences

Having met HMRC to discuss the CSE in December, we understand that it has not amended its guidance and has not withdrawn this exemption from any taxpayers at this stage, although a Revenue & Customs brief will be issued in due course.

HMRC has confirmed that there is no specific timeline for amending the treatment in light of the CJEU decisions as the issues need to be fully considered.

In the meantime, any housing association which has properly applied the CSE can continue to apply it. If and when the application of the CSE is amended, HMRC has said that there should not be any retrospective consequences.

We are continuing our discussions with HMRC together with the Federation around a potential legal basis on which the CSE might be retained for the social housing sector. If you would be interested in contributing to this discussion, please contact Will Jeffwitz or John Butler at the Federation, or your usual Deloitte contact.

In addition, if your organisation currently benefits or is considering taking advantage of the VAT exemption, please let us know so we can update you on the status of our discussions.