VAT and the cost sharing exemption Rhys Morgan Grant Thornton UK LLP 29 November 2011

1. VAT and the cost sharing exemptionRhys MorganGrant Thornton UK LLP29 November 2011

2. Agenda • Background • Example • VAT exemption • Current position • The future

3. Background • Affects the following industries: • Healthcare • Funeralcare • Financial services • Insurance services • Housing • Sport & leisure • Education / Childcare • Some public services (eg welfare, children's services) • Gambling

4. Background (cont.) • To make efficiency savings cooperatives might want to share services with others • Current UK legislation can result in VAT being charged which would not be recoverable if used for an exempt or non-business purpose • Up to 20% additional cost associated with sharing services

5. Background (cont.) • "The loss of VAT is often quoted as a barrier to collaboration" (HM Treasury, January 2011) • Definitions (Oxford English Reference): • "collaborate - when two or more people work together to create the same thing, to work jointly" • "cooperate - the process of working together for a particular purpose, to the same end"

6. Background (cont.) Example 1

7. Background (cont.) Example 2 Services + VAT Services + VAT

8. Background (cont.) Service Provider Example 3 Services + VAT Services + VAT Services + VAT Services + plus

9. Background (cont.) Example 4

10. Background (cont.) • Is the “cost sharing” exemption the solution? Will it remove the VAT charge?

11. Example Services Services Cost Sharing Group Ltd Staff costs Insurance Goods / services

12. Example (cont.) • Current Position: • Secondary Co-operative providing £500,000 of services (plus VAT on £500,000) to members • £500,000 comprised 80% of staff cost; 20% goods & services • Co-op recovers £20,000 of VAT (on £100,000 of goods & services purchased to provide to members) • Members unable recover VAT - Total cost of services - £600,000 • Total cost to group - £580,000 per annum

13. Example (cont.) • Under cost sharing exemption: • Secondary Co-operative providing £500,000 of services (no VAT) to members • £500,000 comprised 80% of staff cost; 20% goods & services • Co-op suffers irrecoverable VAT of £20,000 (on £100,000 of goods & services purchased to provide to members) • Total cost to group - £520,000 • Total savings - £60,000 per annum

14. Exemption • The 'missing' exemption • The exemption is a mandatory requirement by virtue of EU legislation • Art 132 (1) (f) EC Directive 2006/112 • Has not yet been implemented into UK legislation

15. Exemption (cont.) • So what is the "cost sharing" exemption? • the supply of services by independent groups of persons • who are carrying on an activity which is exempt from VAT or is a non-business activity • for the purpose of rendering to their members the services directly necessary for the exercise of their activity • when these groups merely reclaim from their members exact reimbursement of their share of the joint expensesand • provided that such exemption is not likely to cause distortion of competition

16. Current position • In Europe: • Increased interest in the exemption by the EU Commission • Looking closely at non-implementation and incorrect implementation throughout EU • Potential infraction proceedings

17. Current position (cont.) • In the UK: • Two Budgets of 2010 showed political will for implementation in UK • October 2010 Spending Review (£81bn of cuts over four years) • "Big Society" policy launched • Informal consultation from early 2011 • Consultation exercise June 2011 (closed 30 September 2011) • Draft legislation expected on 6 December 2011

18. The future • Political will in UK • Implementation Budget 2012? • International Year of Cooperatives 2012 • Art 132 (1) (f) EC Directive 2006/112 - has "direct effect"

19. The future (cont.) • Consider implementation in your organisation • Review plans for working together with similar cooperatives: • by shared aims • by geography • by industry sector • by services • Undertake cost / benefit analysis • Consider options for restructuring • Seek written ruling from HM Revenue & Customs

20. The future (cont.) DO NOT IGNORE THIS OPPORTUNITY….

21. Rhys MorganSenior ManagerGrant Thornton UK LLPTel: 020 7865 2702Email: rhys.morgan@uk.gt.com