Cost Sharing Exemption

Both EU and UK VAT law contain legislation designed to relieve VAT on the recharge of costs between ‘independent groups of people’ who make exempt or non-business supplies. The UK legislation was introduced in July 2012. This is therefore a basic provision of UK and EU law which does not require notification to, or permission from HMRC.

Establishment of an appropriate legal entity

The cost sharing exemption (CSE) first requires the establishment of a legal entity referred to as a cost sharing group (CSG). The CSG must be owned only by the members to which it provides services. Ownership is typically through the issue of shares, but other membership structures can be considered if these are more appropriate, and the CSG does not have to be a corporate body. A CSG can also be a charity.

The key issue to address is that the CSG is in place to provide services to its members. Any supplies to non-members would be subject to VAT in the normal way.

Provision of services

Subject to the detailed provisions set out below, the CSG’s services to its members are exempt from VAT. It is worth noting that the CSE is mandatory, so all services which qualify are therefore exempt from VAT.

The benefit of the CSG is not in allowing the recovery of VAT on third-party expenditure, but rather in relieving the need to charge VAT on services provided to members. The VAT burden to members is therefore reduced by reference to the costs of any staff or directors employed by the CSG.

If staff are seconded to the CSG by member practices, this supply will be liable to VAT, if the practice is or becomes required to register for VAT, as a result of the secondment. There are a variety of ways in which this VAT charge can be removed:

  • Joint employment;
  • Employment by the CSG;
  • The HMRC staff hire concession.


The CSG must satisfy the following conditions, which have recently been updated following the issue of two Revenue and Customs Briefs (RCB) and an Information Sheet during 2018. Alongside the most recent RCB, HMRC have also updated their internal guidance. The details below take account of all these updates.

  • The CSG must be an independent entity supplying services to its members;
  • The members must carry on activities which are either exempt from VAT or non-business;
  • The services must be directly necessary for the members exempt or non- business activities;
  • The CSG must only recover the exact cost of the services from its members;
  • The application of exemption must not cause a distortion of competition.

The CSG must be an independent entity

The CSG must be independent from its members. HMRC define this as the need for a separate legal entity, with members holding shares or some other ownership interest. There must be at least two members. If there are only two members, the CSG cannot be included in a VAT group with either member.

The members must carry on exempt or non-business activities

This condition will be satisfied by a GP Practice. If there are other members not directly engaged in the provision of healthcare, we may need to confirm whether they qualify for membership of the CSG.

The services must be directly necessary for the members’ exempt activities

If the Practice is registered for VAT or the CSG supports a separate business owned by the Practice which makes taxable supplies, for example a pharmacy, the CSG will be required to apportion its supplies and charge VAT on the element which supports the taxable supplies of its members. HMRC will typically accept that the VAT recovery of the member Practice can be used to determine the proportion of the CSG’s charges which are liable to VAT.

For example, if a Practice is VAT registered and can recover 10% of the VAT incurred on its operating costs, the CSG will charge VAT on 10% of the services it supplies to the Practice. If the Practice is not VAT registered, the CSG will treat the entirety of its supplies as exempt from VAT. Hopefully it is apparent that any VAT charged by the CSG will be recoverable, as it will relate only to the taxable supplies made by the member Practice.

The CSG must only recover the exact cost from its members

The CSG must not seek to make a profit and must be able to demonstrate that it applies a methodology which supports cost recovery from its members. A detailed analysis of the CSG’s management accounts would provide appropriate support.

The application of the exemption must not cause a distortion of competition

In practice, this condition will always be satisfied providing the CSG is a closed loop, only seeking to support its member Practices. In other words, this is not a commercial outsourcing concern in competition with other third parties.

Other Supplies

Any other supplies by the CSG which do not fall within the CSE are taxed in the normal way.

If it makes other supplies, it would need to demonstrate an appropriate separation of costs between its CSG business and other unconnected supplies.

Retrospective application

It is possible that the CSE conditions are already in place, and that a CSG has been established to support its members without paying close attention to the VAT rules. This is not uncommon for example with GP Federations. It may then be necessary to consider potential adjustments to previously submitted VAT returns if the CSG is registered for VAT.

Notification to HMRC

There is no requirement to notify HMRC. The CSE is a mandatory provision, which is satisfied by proper application of VAT law. You may wish to notify HMRC as part of good governance and the maintenance of a working relationship with HMRC.

If you would like to discuss this in more detail please email Jonathan Main or call us on 01772 821 021.