Shared services VAT a major barrier to collaborative working

30th September 2011

Shared services VAT costs are a major obstacle to effective collaboration, an alliance of organisations has warned today.

The National Council for Voluntary Organisations (NCVO), Charity Finance Directors’ Group (CFDG), Universities UK and the National Housing Federation are warning HM Revenue and Customs that the VAT charge on shared services acts as a massive barrier to collaboration, preventing efficiency savings and more effective working arrangements. This is at odds with the government’s drive to get more organisations working together, especially against a backdrop of austerity and funding reductions.

HMRC are currently consulting on implementation of a cost sharing exemption available to charities which is mandatory under European law. However, the organisations caution that in its proposed form the exemption is likely to be of little use to the charity sector, particularly smaller organisations who in many cases could benefit the most from cost sharing.

Sir Stuart Etherington, Chief Executive of NCVO, said: ‘The government needs to look at the wider picture and seize this opportunity to address what is a longstanding issue for charities. Collaborative working not only delivers cost savings, but it also helps charities to provide better services with service users’ needs in mind. We know that there is appetite within the sector to work together more effectively and efficiently, especially in these challenging economic times. It now rests on Government to ensure that collaborative working is a worthwhile and straightforward venture open to everyone.’

Caron Bradshaw, Chief Executive of CFDG, said: ‘VAT on shared services is a huge issue for charities and has been raised repeatedly by our members over the years. It is yet another example of how charities do not operate on a level playing field with the public and private sectors, who often share services to keep down costs. Under the current system, shared service arrangements must generate savings of at least 20 per cent to cover the VAT charge, plus enough for the substantial start up costs, to be worthwhile. This means that many charities with specialist staff and expertise cannot sensibly share these with others, and so potential cost savings are lost.

 ‘While it is no panacea, the exemption is an important part of the solution. We fear that as it currently stands the exemption will do little to address the problem and an key opportunity will be missed.’

Nicola Dandridge, Chief Executive of Universities UK, said: ‘Universities are committed to working more efficiently while continuing to provide an excellent learning experience for students and supporting world class research. Shared services are one of the ways in which institutions can reduce costs, improve the quality of services and release much-needed resources to support core activities of teaching and research.

‘However, current VAT rules make this difficult and we urge the government to act on the recommendations of the Universities UK Efficiency and Modernisation Task Group and implement the cost sharing exemption. This will incentivise greater collaboration and more efficient working within the sector, and create opportunities for organisations working in different fields to innovate and share services.’

David Orr, Chief Executive of the National Housing Federation, said: ‘Many not-for-profit organisations want to work in partnership, want to improve their services and want to save costs - but know if they do so they will be hit with an additional VAT charge.

‘Ministers need to ensure that there is sufficient flexibility in the arrangements to enable as many organisations to benefit from the exemption as possible. This means ensuring that the proposals are commercially and legally achievable and that the administrative burden of complying with this exemption is not too significant a barrier to make this measure a benefit for housing associations.’

The organisations also warn that the issue of irrecoverable VAT leaves charities at a massive financial disadvantage compared to other sectors and further disincentivises collaboration.

The HMRC consultation on VAT cost sharing exemptions closes today, with feedback expected in the autumn.

For more information, contact Mandy Murphy in NCVO’s press office on 020 7520 2469 or email mandy.murphy@ncvo-vol.org.uk. For calls outside office hours, please ring 07714 243942.

Notes to editors:

1.The VAT Cost Sharing Exemption, contained in Article 132 (1) (f) of the Principal VAT Directive (PVD), is a provision in European law that allows businesses and organisations making VAT exempt and/or non-business supplies to form groups to achieve cost savings and economies of scale. Once formed the groups are relieved of a VAT charge on their supplies if all the conditions of the exemption are met. NCVO and CFDG have submitted a joint response to the cost sharing exemption consultation, which can be viewed on the CFDG website from tomorrow.

2.The National Council for Voluntary Organisations (NCVO) www.ncvo-vol.org.uk is the umbrella body for the voluntary sector in England, with sister councils in Wales, Scotland and Northern Ireland. NCVO has over 8,400 members, ranging from large national bodies to community groups, volunteer centres, and development agencies working at a local level. With over 280,000 staff and over 13 million volunteers working for our members, we represent and support almost half the voluntary sector workforce.

3.The Charity Finance Directors’ Group (CFDG) is the charity that supports charities in their finance-related functions, promoting best practice in charity finance, driving efficiency and helping organisations to make the most out of their money. CFDG’s circa 1,700 members – all senior financial professionals in the voluntary sector – are responsible for managing around £21.75 billion in charity funding. Our members work at the heart of the strategic development of their organisations, and are at the forefront of delivering a sustainable and efficient charity sector. www.cfdg.org.uk

4.The National Housing Federation represents 1,200 housing associations in England. Our members provide two and a half million affordable homes for more than five million people. www.housing.org.uk Universities UK is the major representative body and membership organisation for the higher education sector. It represents the UK's universities and some higher education colleges. Its 133 members are the executive heads of these institutions. Universities UK works closely with policy makers and key education stakeholders to advance the interests of universities and to spread good practice throughout the higher education sector. Founded in 1918 and formerly known as the Committee for Vice-Chancellors and Principals (CVCP), Universities UK celebrated its 90th anniversary in 2008. www.universitiesuk.ac.uk

5.The British Universities Finance Directors Group (BUFDG) has submitted a response to the consultation on behalf of the higher education sector, and have worked closely with HM Treasury and HM Revenue & Customs to understand the implications of the introduction of the cost sharing exemption. Please see the BUFDG website for further details. www.bufdg.ac.uk

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