The UK Government Commences Consultation On Removing The VAT Burden Of Collective Procurement Of Services By VAT-Exempt Bodies

On 28 June 2011 the UK Government issued a detailed consultation paper in which they proposed the creation of a new facility designed to assist both business and non-business organisations that wish to pool their resources in order to procure services on a collective basis without suffering additional VAT problems as a result. These proposals are now subject to public consultation until 30 September 2011.

The basic problem

Various organisations could potentially procure third party services (such as staffing or IT support) on a more cost-effective basis if they combined with other similar organisations in order to create some kind of collective procurement agency which acted on behalf of all its members.

The problem with this is that the general cost savings obtained from economies of scale might well be eroded – or even exceeded – by the additional VAT costs of such an exercise if the ultimate beneficiaries of the arrangement were organisations which were unable to recover all or most of the VAT charged to them by VAT-registered business suppliers. Such recovery problems would affect business entities that were engaged mainly in VAT-exempt activities (such as banking, insurance and healthcare) or major non-business organisations, such as charities, trade unions or political bodies.

European VAT law provides a potential solution to this problem but the UK has so far failed to enact any domestic VAT legislation that implements the solution. As a matter of general European VAT law, it is permitted for an EU Member State to create a special VAT regime under which expenses of a group of organisations are pooled through a separate entity, which then procures services from third party suppliers and makes onwards supplies of such services at cost to the group of organisations which funded the procurement body. If the procurement body meets certain conditions, the onward supplies by that body may be exempted from VAT, so that the general savings of collective procurement are not diluted through additional VAT charges.

In principle, the benefits of such an arrangement could be combined with ordinary VAT grouping (i.e. the consolidation of closely related companies into a single notional entity for VAT purposes, so that no separate VAT administration of related companies is required). The UK tax authorities have also indicated that they see no objection to the operation of such an arrangement on a cross-border basis, as regards both location of...

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