19 March 2019 - Article
On 28 June 2011 the UK Government issued a detailed consultation paper in which they proposed the creation of a new facility designed to assist both business and non-business organisations that wish to pool their resources in order to procure services on a collective basis without suffering additional VAT problems as a result. These proposals are now subject to public consultation until 30 September 2011.
The basic problem
Various organisations could potentially procure third party services (such as staffing or IT support) on a more cost-effective basis if they combined with other similar organisations in order to create some kind of collective procurement agency which acted on behalf of all its members.
The problem with this is that the general cost savings obtained from economies of scale might well be eroded – or even exceeded – by the additional VAT costs of such an exercise if the ultimate beneficiaries of the arrangement were organisations which were unable to recover all or most of the VAT charged to them by VAT-registered business suppliers. Such recovery problems would affect business entities that were engaged mainly in VAT-exempt activities (such as banking, insurance and healthcare) or major non-business organisations, such as charities, trade unions or political bodies.
European VAT law provides a potential solution to this problem but the UK has so far failed to enact any domestic VAT legislation that implements the solution. As a matter of general European VAT law, it is permitted for an EU Member State to create a special VAT regime under which expenses of a group of organisations are pooled through a separate entity, which then procures services from third party suppliers and makes onwards supplies of such services at cost to the group of organisations which funded the procurement body. If the procurement body meets certain conditions, the onward supplies by that body may be exempted from VAT, so that the general savings of collective procurement are not diluted through additional VAT charges.
In principle, the benefits of such an arrangement could be combined with ordinary VAT grouping (i.e. the consolidation of closely related companies into a single notional entity for VAT purposes, so that no separate VAT administration of related companies is required). The UK tax authorities have also indicated that they see no objection to the operation of such an arrangement on a cross-border basis, as regards both location of participants and provision of relevant services. This would seem to allow various VAT planning opportunities.
The conditions to be satisfied
In the view of the UK tax authorities (as expressed in the recently published consultation paper) there are five conditions which must be satisfied if such an arrangement is to be exempted from VAT:
- participants must be an “independent group of persons”
- participants must be engaged in “non-taxable activities”
- the services provided through such an arrangement must be “directly necessary” to members’ non-taxable activities
- the procurement body must only receive “exact reimbursement” of relevant costs and must not make profits out of its dealings with any participants
- the operation of such an arrangement must not be likely to cause distortion of competition
Proposed structure of the VAT exemption
The UK tax authorities are currently seeking the views of affected parties as to the design details of a suitable exemption. Key points which now need to be addressed are as follows:
- whether the procurement needs to be arranged through a specific entity, such as a company, or whether some form of looser agreement or association would suffice
- whether eligibility for exemption of services should be by reference to a detailed list of specific services or by reference to the general percentage of an organisation’s activities that fell outside the scope of VAT
- how to deal with timing differences between incurring of costs and receipt of relevant funding when seeking to ensure that a procurement body only obtains “exact reimbursement” of its costs (for example, so as to allow participants a measure of credit or to allow the procurement body an opportunity to accumulate a surplus in respect of possible future procurement exercises)
- how such an exemption might conceivably lead to any relevant distortions of competition (in which respect it appears that the mere absence of profit and/or the mere exemption of the arrangement from VAT are not regarded as relevant forms of distortion)
- how widely such an exemption should be made available (since some other countries appear to have confined such systems to non-business organisations, even though the basic EU VAT framework legislation is not necessarily intended to be implemented so restrictively)