Why is a cost sharing exemption needed?

The cost sharing exemption (CSE) has been included in Directive 2006/112/EC (the VAT Directive) since 1977. However, it was only introduced into the UK VAT legislation with effect from 17 July 2012. The delay in implementing this exemption resulted from the UK's uncertainty over the Scope and purpose of the relevant provision of the VAT Directive. The lack of clarity relating to this provision resulted in an uneven playing field across the EU as Member States implemented this exemption in different ways. It also resulted in EU litigation, the outcome of which assists practitioners in interpreting the exemption.

Historically, HMRC argued that the VAT grouping provisions in the UK VAT legislation were sufficient to cover the CSE as provided in the VAT Directive. However, the European Commission commenced proceedings against various Member States for incorrect enactment of this exemption, which appears to have spurred HMRC and HM Treasury to reconsider the position and move forward to implement a specific CSE in the UK VAT legislation.

The Court of Justice released