HMRC to consult on VAT exemption for shared services

HM Revenue & Customs has launched a consultation programme containing proposals to exempt some shared services arrangements from VAT.

Under the proposals, shared service partnerships set up by health providers, charities, housing associations and universities would be exempt from VAT.

The proposals have been drafted in response to the European Principal VAT Directive, which includes mandatory cost-sharing exemptions yet to be implemented in the UK.

As HMRC noted in its consultation document: “There is considerable uncertainty as to the scope and purpose of the exemption and it is also not clear how the various conditions of the exemption should be applied.”

Under current arrangements, some organisations and businesses find that VAT can be an obstacle to the establishment of shared services arrangements.

HMRC’s new proposals are designed to alleviate that burden without creating loopholes for others to exploit.

Under the Revenue's proposals, two charities could, for example, choose to share back-office functions, and that cost-sharing group's services would then be exempt from VAT, said Peter Crush, director of indirect tax at consultancy group KPMG.

"The Revenue appears to be trying to make it easier for organisations whose activities do not carry VAT to set up shared services arrangements," he said.

Currently, many of those organisations – such as charities, universities and the like – would be unable to reclaim the VAT that a shared service group would incur, he added.

But HMRC has yet to clarify how its proposals would affect IT service provision delivered under a shared service agreement.

In the case of two charities setting up an independent body to deliver back-office functions, any IT service provider contracted by that body would expect to charge VAT.

But in many shared services partnerships, IT service providers become a full partner in the agreement. If VAT is not going to be levied on services delivered by that partnership, there is the possibility that IT services could also be exempt.

"It's important to remember that this is only a consultation document at this stage. Things may change," said Crush. "But HMRC seem to be taking a more generous line in some areas than other [European countries], and I think that is to be welcomed."

The consultation process runs until 30 September 2011.