Clause 196 - Exempt supplies

Finance Bill – in a Public Bill Committee at 10:00 am on 21st June 2012.

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Question proposed, That the clause stand part of the Bill.

Photo of Rachel Reeves Rachel Reeves Shadow Chief Secretary to the Treasury

Clause 196 relates to an element of VAT that is not quite as controversial as the VAT issues that we have focused on already this morning. I declare that I, along with other members of the Committee no doubt, receive support from the Parliamentary Research Service, which will, I understand, benefit from the changes.

The provision has the effect of exempting from VAT the supply of services by a group that consists of persons engaging in exempt or non-taxable activities, as long as the services are supplied to group members at cost and for the purpose of the activities. That is a technical description, but I guess that their experience of the PRS will indicate to Members the types of activity covered. The exemption will potentially benefit charities, universities, colleges, housing associations and businesses that undertake exempt activities, and we are happy to support the measure.

Photo of David Gauke David Gauke The Exchequer Secretary

May I, like the hon. Member for Leeds West, make a declaration of interest, in that I am a member of the Parliamentary Resources Unit, which could potentially benefit from the clause, as I suspect some of my hon. Friends may be.

Clause 196 introduces the so-called cost-sharing exemption, and will allow qualifying organisations, such as charities and housing associations, to form cost-sharing groups allowing the recharge of participants to be exempt from VAT. I would like to provide hon. Members with some background.

The clause introduces a new VAT exemption into UK law. It will apply when businesses and organisations with exempt or non-business activities come together as a cost-sharing group to share services. Under current UK legislation, such arrangements generally result in VAT being charged between the participants. The VAT charged can become an obstacle to cost-sharing arrangements if the payer is, for example, a charity or a university that is unable to recover the VAT in full.

The cost-sharing exemption provides a solution to the problem by removing the VAT charged between the participants. The exemption has never previously been introduced into UK VAT legislation, because it has not  been clear how it should be implemented. The wording in the European legislation is open to different interpretations, and in member states where implementation has occurred it has been interpreted in different and, in some cases, contradictory ways.

However, the position has changed. Following a period of extensive consultation since March 2010, including a formal consultation last summer, there is now a better understanding of how the exemption can be applied. The UK is now in a position to implement it.

The clause helps businesses and organisations that seek cost efficiencies to work with others to share costs and resources. It also supports the Government’s objective of a fair tax system.

A formal consultation on the introduction of the exemption took place last summer for 12 weeks. Respondents welcomed the decision to allow a wide range of shared services to qualify for the exemption. However, it was also felt that other aspects of the proposals would restrict its potential use. One that was highlighted in particular was the requirement that there should be a cost-sharing vehicle, and that it should be separate from its members and could not be controlled by just one of them.

That condition is imposed by EU law, so we must maintain the requirement that a separate cost-sharing vehicle be set up, for the exemption to apply. However, we have been able to relax the condition relating to control. It will now be possible for one member to control the cost-sharing vehicle and still qualify for the exemption. We believe that that falls within the parameters of the European legislation.

The Government have listened and, where possible, have made changes to provide flexibility for potential users. HMRC has also consulted on the draft guidance to ensure that it meets user needs. It will publish the final guidance ahead of the “go live” date at Royal Assent.

The clause supports the Government’s objective of a fair tax system. It reduces one of the barriers to achieving efficiencies through co-operation and collaboration by businesses and organisations such as charities, universities, colleges and social housing organisations. I welcome the cross-party support for it.

Question put and agreed to.

Clause 196 accordingly ordered to stand part of the Bill.