HM Revenue & Customs has been too strict in its interpretation of an EU exemption which would help charities save costs by allowing them to recover VAT on shared services, the Chartered Institute of Taxation has claimed.
The exemption, which has never been applied in the UK despite being introduced more than 30 years ago by the EU, is intended to allow charities and other businesses that cannot recover all their VAT to save money by collaborating.
A consultation from HMRC about the exemption says it is intended to apply only to "directly necessary" services, which would not normally include back-office functions such as payroll or HR.
The consultation also proposes an alternative that would allow charities that can recover only a small proportion of their VAT to use it, even for back-office services. But in its response the institute, a charity itself, said it disagreed with the HMRC interpretation.
"We very much welcome the implementation of the exemption," said Stephen Coleclough, vice-president of the institute: "But we are concerned that there are already attempts to limit its application, even before the consultation has concluded." Member states were not allowed to put their own interpretation on the rules, he said.
The institute said it believed all that was required for the exemption to apply was for services to be provided by an external, not-for-profit group, be used to support services on which VAT could not be recovered and did not distort competition.
"It is difficult to envisage any services that a business might outsource to a cost-sharing group that will not be directly necessary to the business of the group’s members," said Coleclough. "Even costs such as for accounting are directly necessary, given that the business has to recover its costs from members.
"We will be asking HMRC to explain just what services of a cost-sharing group they do not see as qualifying for exemption."
An HMRC spokesman said: "Within the strict terms of the exemption, ‘back-office’ services are unlikely to qualify, but the consultation document offers a preferred option that would allow such services to benefit from the exemption to a large extent.
"However, no decisions on how to proceed have been made, nor will they until after the formal consultation period has ended and the responses have been considered."
A group of charities, including the National Council for Voluntary Organisations and the Charity Finance Directors’ Group, said last week that it felt the requirement to provide services through a cost-sharing group meant that the exemption was "of little use" to charities.