HMRC Brief 3 (2018): changes to the VAT exemption for cost sharing groups

HMRC has released a Brief and Information Sheet announcing immediate changes to the Cost Sharing Exemption (CSE). This follows the recent ECJ cases of Commission v Luxembourg (C-274/15), Aviva (C-605/15), DNB Banka (C-326/15), Commission v Germany (C-616/15). Section 4 of the Brief sets out the immediate effects.

In Section 4(a) the Brief confirms that the CSE will be restricted to members who engage in exempt activities in the following Exemption Groups in Schedule 9 of the VAT Act 1994, with effect from the date of issue of this Brief (22 March 2018).

These are

• postal service (Group 3)

• education (Group 6)

• health and welfare (Group 7)

• subscriptions to trade unions and professional bodies (Group 9)

• sport (Group 10)

• fund raising by charities (Group 12)

• cultural services (Group 13)

These are the exemptions for certain activities in the public interest under Article 132 in the Directive.

The Brief adds that:

- the judgments did not cover non-business activities and therefore CSGs engaged in these activities are unaffected by this change;

- there will be interim transitional measures until 31 May 2018 for existing CSGs that have operated the previous guidance correctly and who can continue to apply and rely on that guidance until then (but note these transitional provisions cannot be relied upon in cases of avoidance or distortion). Only services performed before the 31 May can benefit from the transitional measures;

- Housing Associations can continue to apply the CSE for the time being until HMRC gives more guidance; and

- HMRC is considering what to do about the UK’s 85% test in order to comply with the ECJ decision concerning the directly necessary condition for exemption.


Non-UK members - In Section 4(b) the Brief confirms that HMRC policy will be amended to restrict the CSE to members located in the UK. HMRC will no longer allow the exemption to be applied to transactions with members located in other EU Member States. The CSE has not been permitted for members located outside of the EU, and this will remain the position.

Uplift / transfer pricing – In Section 4(c) the Brief confirms that the CSE will not be permitted where an uplift has been charged on transactions for transfer pricing purposes. The Brief adds that it remains HMRC’s position that the CSE will not be permitted in any case where exact reimbursement cannot be evidenced.


With the UK leaving the EU, the UK had previously been relatively relaxed about pushing forward / implementing changes required to make us EU compliant. However, following the recent infringement activity by the Commission in relation to customs duties and the Terminal Markets Order, this may have prompted the UK to publicly clarify and set out an immediate restricted application of the CSE, without changing the law.