After David Willetts’ bold statement at the Politeia Winter address that it’s full steam ahead for shared services now that the VAT barrier has been removed (see our scepticism in last week’s digest), a further concern has come about. Last Thursday the European Commission officially asked Luxembourg to change its interpretation of the Cost Sharing Exemption because the Commission believes it is incompatible with European Union law. The key area of difficulty is in their interpretation of “directly necessary”. In Luxembourg, all services supplied to members by a cost sharing group are deemed to be directly necessary providing the members’ taxable activities do not exceed 30%. For those of you following the UK debate, you will be aware that the proposals for the UK are very similar, although the threshold for taxable activities is slightly lower at 15%.
In our view the proposed UK interpretation introduces a risk of challenge from the EU commission - For those who are familiar with other VAT provisions, a more natural level would fall at 5%. However this concern comes on top of a the more fundamental issue that the current UK proposals exclude many research intensive institutions (from the Russell Group and 1994 Group). BUFDG have already raised this matter in a meeting with BIS last week and plan to follow up with written representations. If you feel you may have something to add to this then please get in touch.