Cost Sharing Groups: Territorial question unanswered (again)
The Court of Justice of the European Union (CJEU) recently issued a judgment in Kaplan International Colleges UK Ltd. (KIC) regarding a structure a UK group set up to counter the impact of VAT costs incurred on buying in overseas costs by establishing a Cost Sharing Group (CSG). In this article we examine the CJEU’s decision. The CJEU’s final decision was issued following an earlier opinion on what the answer should be, given in April 2020 by Advocate General Kokott.
The background issue
Businesses that buy in services from overseas are often required to apply a ‘reverse charge’ adjustment to, in effect, account for the VAT on the suppliers’ behalf. A reverse charge adjustment prevents ‘VAT-averse’ businesses from seeking to buy in services from outside their territory VAT free; reverse charge mechanisms are adopted across the European Union and elsewhere. VAT-averse businesses incur additional costs as a result.
The structure implemented
Prior to 2014, KIC, as representative member of a UK VAT group, was required to account for UK VAT (under the reverse charge adjustment rules) on services received from student recruitment agents based in China, India, Hong Kong, and Nigeria. However, in 2014 KIC’s eight educational subsidiaries, which were also members of the UK VAT group, along with a minority owned subsidiary, formed a CSG along with a newly formed Hong Kong company (KPS).
KPS took over responsibility from KIC in relation to student recruitment and KPS contracted directly with the overseas agents. KPS then invoiced each of the members of the CSG for their respective share of the costs and claimed a VAT exemption in relation to these charges. KIC was not a member of the CSG but was the representative member of the UK VAT Group that included eight of the nine members of the CSG.
The intention was that charges by KPS to the nine UK colleges representing 100% of the costs incurred by KPS would be free of VAT under the cost sharing exemption to reflect the provisions of Article 132 (1) (f) of the Principal VAT Directive:
“(f) the supply of services by independent groups of persons, who are carrying on an activity which is exempt from VAT or in relation to which they are not taxable persons, for the purpose of rendering their members the services directly necessary for the exercise of that activity, where those groups merely claim from their members exact reimbursement of their share of the joint expenses, provided that such exemption is not likely to cause distortion of competition;”
The broad argument in Kaplan International Colleges UK Ltd. was that the UK colleges were undertaking activities in the public interest (education) and the costs that were recharged at cost by the CSG were directly necessary for the activity and would not lead to a distortion in competition. If the costs are indeed VAT exempt, then no reverse charge applies and so irrecoverable VAT is avoided.
The UK courts referred questions to the CJEU to enable it to reach a conclusion. The questions were regarding the territorial aspects of the arrangements, the interaction between the CSG relief and VAT grouping, and issues around the ‘distortion of competition’ issues.
The findings of the CJEU
The CJEU concluded that the exemption provided in Article 132(1)(f) of the VAT directive did not apply. The CJEU noted a supply of goods or services to a member of a VAT group is deemed to be a supply to the VAT group as a whole. In this case, the supply of services by KPS was, therefore, partly also a supply to KIC (as a representative member of the UK VAT group). This meant that the services were not supplied by KPS just to its members of the CSG and so the exemption in the VAT Directive did not apply.
The CJEU concluded that the exemption laid down in that provision is not applicable to supplies of services made by an independent cost sharing group to a VAT group that is regarded as a single taxable person, where not all the members of the VAT group are members of the cost sharing group.
Given that the matter was decided based on the above rationale, the CJEU did not consider two of the other referred questions, the most important of which was whether, in principle, a CSG could exist with an entity located outside of the member state of the members. In the April 2020 opinion delivered in this case, Advocate General Kokott considered the cross-border aspect was not permitted. She had expressed the same view in her earlier opinions on two other cost sharing judgments: DNB Banka and Aviva, however in all three final judgments, the CJEU has not directly addressed this matter because it was able to conclude the arrangements were ineffective for other reasons.