This means that two businesses which have no wish to merge, but good reasons to pool some of their resources for efficiency’s sake cannot do that. They cannot form a group VAT registration because they are not under common control. They cannot employ staff jointly because of the employment law issues (and indeed possible HMRC challenge as detailed in the following blog: http://www.haysmacintyre.com/blog/servants-of-two-masters-.aspx). 

 

Whilst this is not often a pressing concern of wholly commercial companies competing in the same marketplace (whose competition would be compromised by such close association) it can affect two different exempt businesses which operate from the same premises, or are neighbours (perhaps an undertaker sharing with a neighbouring insurance broker… and jointly developing burial insurance… but I digress). It could easily affect charities, since these often do not see like-minded charities as competitors. In fact, charities often wish to avoid merger simply to preserve the goodwill in their name or history and the focus each has on a specific angle concerning their mission. They will happily share services to create efficiency, but do not want to lose their identity to do so. Consider hospices. The value of a separate geographically local mission is incalculable, but they may well want to share a fundraising function (for example).

 

VAT acts as an enormous barrier to sharing. But it need not. Under the Principal VAT Directive, Article 132(1)(f), organisations engaged in exempt or non-economic activities may form “groups” of which they are members. Those members (which can be as few as two) can share the cost of services provided by or within the group as long as only the bare cost of the provision is recouped from the members to defray the expense (that is, nobody makes a surplus from the exercise). All such services are themselves exempt in that strict case. So, all that the Directive seems to require, to unlock this easement, is that a group of like minded organisations that have exempt or non-business activities specifically form this “group” and then work things so that the cost incurred on a service they wish to share is simply shared in aliquot sums so there is no surplus generated for anyone.

 

Many readers will by now think I have lost my senses. Surely if it were as simple as this, they would have heard about it. The reason you have not heard is that this rule has never been introduced into the UK VAT legislation, despite being mandatory. It is surprising to say the least that the UK government has not faced a major challenge on the point.

 

But the times are a-changing (perhaps…). HMRC launched a consultation into the VAT Cost Sharing Exemption earlier this year, and all potentially interested parties need to respond to it by 30 September 2011. The details are found here: http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageLibrary_ConsultationDocuments&propertyType=document&columns=1&id=HMCE_PROD1_031398 . 

 

Those who read this may experience a sense of deflation, in the light of my comments. They will see that HMRC says that, for this to work, a separate company or unincorporated association (or similar) would need to be set up. This body will then presumably have to procure the services directly, and then sell them to the members. That means more back office bureaucracy, and a rigid structure whereby staff have to be employed, and contracts entered into, by a third party to those businesses which would like to share costs. There is no apparent offer of a model that simply allows such businesses to share costs on a nil gain basis, by direct charge between members.

 

In addition the consultation document takes us through a debate over how we define services that are “directly necessary” for the exempt or non-business activities of members. It considers the proportion of the members’ activities which have to be exempt or non-business, rather than taxable. It concerns itself over how to ensure that there is only a reimbursement of costs and not something more.

 

Taken too far, this could have the effect of killing off an exemption through a superfluity of red tape. We are in danger of appearing hide bound by the arguable restrictions of a piece of European VAT legislation – a piece of legislation that was self evidently drafted in a casual manner – when more pro EU countries tend to apply the spirit of EU law, and defend their approach with the European Commission if the Commission takes issue with their implementation. 

 

Is the UK going to fall into that trap, or sleep walk into a duvet of red tape? Your response to the potential over-engineering of this legislation and your willingness to make a response by 30 September, could have a real impact on whether something simple and useful will come of this.