Court of Justice European Union (CJEU) case may end VAT cost sharing groups for real estate businesses

Since the introduction of VAT cost sharing groups came into UK law in 2012, some real estate businesses use the facility to mitigate VAT costs. However, the CJEU has ruled that a cost sharing group may only apply to organisations who carry out activities which are in the public interest.

Key to this issue is that VAT exemption in the EU principal VAT directive (PVD) is split into two parts:

  • Exemptions for activities in the public interest – eg healthcare, welfare, education and sport. This part also includes the cost sharing exemption; and
  • Exemptions for other activities – eg financial services and land and property.

The DNB Banka case focused on the supply of financial services. Because of this the CJEU determined that its activities were not in the public interest and the Cost Sharing Group rules should not apply.

What does this mean?

There is no such restriction under current UK VAT law and its expected that real estate businesses may still rely on current cost sharing groups. However, the UK may change its rules to take into account this ruling. Real estate businesses which have set up cost sharing groups may now need to revisit and consider alternative options to mitigate VAT costs, such as VAT groups and partial exemption methods.

Please contact Ian Carpenter for more information.