Draft "shared services" clauses for the Finance Bill 2012 will make it easier for charities to pool services without incurring a VAT charge, according to charity finance experts.
The clauses would implement a European exemption that allows the creation of "cost-sharing groups", which can deliver services to charities without charging VAT.
Under existing law, if charities share services such as IT and HR, they incur what the Charity Tax Group has called an "artificial VAT charge" that most private sector companies do not have to pay.
In last month’s autumn statement, the government confirmed that charities would be granted VAT relief on shared services.
The draft legislation, published yesterday, will allow cost-sharing groups to be set up under the control of a single charity and will no longer require them to have no overall control, as was the case in the rules put forward for consultation by HM Revenue & Customs in the summer.
Caron Bradshaw, chief executive of the Charity Finance Directors’ Group, said that the removal of the "no overall control" requirement would make it much easier for a large charity to set up a cost-sharing group to provide services to smaller ones.
She said that the difficulty of setting up a cost-sharing group owned by a number of charities, with no one having overall control, made that option unworkable for most charities.
Chris Lane, policy officer at the CTG, said the government would ideally have allowed charities to provide services directly to one another, without the need for a separate group. But he said the proposals were a step in the right direction.
The draft legislation says charities will only be able to take advantage of the cost-sharing exemption to procure back-office services that are not "directly necessary" if 85 per cent or more of their activities are "exempt or non-business" activities, on which an organisation cannot recover VAT.
Both the CFDG and the CTG said the rule would make using the exemption more difficult for many organisations.