1. © 2011 Grant Thornton UK LLP. All rights reserved. VAT and the cost sharing exemption Rhys Morgan Grant Thornton UK LLP 29 November 2011

2. © 2011 Grant Thornton UK LLP. All rights reserved. Agenda Background Example VAT exemption Current position The future

3. © 2011 Grant Thornton UK LLP. All rights reserved. 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. © 2011 Grant Thornton UK LLP. All rights reserved. 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. © 2011 Grant Thornton UK LLP. All rights reserved. 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. © 2011 Grant Thornton UK LLP. All rights reserved. Background (cont.) Coop 1 Coop 2 Coop 3 Coop 4 Example 1

7. © 2011 Grant Thornton UK LLP. All rights reserved. Background (cont.) Coop 1 Coop 2 Coop 3 Coop 4 Example 2 Services + VAT

8. © 2011 Grant Thornton UK LLP. All rights reserved. Background (cont.) Coop Group Coop 1 Coop 2 Coop 3 Coop 4 Service Provider Services + VAT Services + plus Services + VAT Example 3

9. © 2011 Grant Thornton UK LLP. All rights reserved. Background (cont.) Coop 1 Coop 2 Coop 3 Coop 4 Example 4

10. © 2011 Grant Thornton UK LLP. All rights reserved. Background (cont.) Is the “cost sharing” exemption the solution? Will it remove the VAT charge?

11. © 2011 Grant Thornton UK LLP. All rights reserved. Example Cost Sharing Group Ltd Services Staff costsInsurance Goods / services

12. © 2011 Grant Thornton UK LLP. All rights reserved. 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. © 2011 Grant Thornton UK LLP. All rights reserved. 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. © 2011 Grant Thornton UK LLP. All rights reserved. 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. © 2011 Grant Thornton UK LLP. All rights reserved. Exemption (cont.) So what is the "cost sharing" exemption? 1.the supply of services by independent groups of persons 2.who are carrying on an activity which is exempt from VAT or is a non-business activity 3.for the purpose of rendering to their members the services directly necessary for the exercise of their activity 4.when these groups merely reclaim from their members exact reimbursement of their share of the joint expenses and 5.provided that such exemption is not likely to cause distortion of competition

16. © 2011 Grant Thornton UK LLP. All rights reserved. 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. © 2011 Grant Thornton UK LLP. All rights reserved. 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. © 2011 Grant Thornton UK LLP. All rights reserved. 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. © 2011 Grant Thornton UK LLP. All rights reserved. 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. © 2011 Grant Thornton UK LLP. All rights reserved. The future (cont.) DO NOT IGNORE THIS OPPORTUNITY….

21. © 2011 Grant Thornton UK LLP. All rights reserved. Rhys Morgan Senior Manager Grant Thornton UK LLP Tel: 020 7865 2702 Email: rhys.morgan@uk.gt.com