CSE3920 - How the conditions are to be interpreted: Direct Reimbursement of Costs: What is meant by ‘direct reimbursement of costs’?

For the exemption to apply the consideration for supplies made by the CSG to its members has to be an ‘exact reimbursement’ of the members’ share of the joint expenses, this includes start-up costs, any general overheads incurred by the CSG in providing services to its members as well as any discounts received or input tax recovered by the CSG.

For there to be a ‘direct reimbursement’ of costs, there must be no profit element in the charges made by the group to its members, that is, no margin or mark-up must be factored into the cost of providing the services. So, for example, if the CSG receives discounts from its suppliers they have to be passed on to members by computing them into the CSGs charges to its members. If supplies to members of the CSG by the CSG do include a profit element the exemption will NOT apply and those supplies will be subject to the normal VAT rules.

This means that (a) there has to be a clear “audit trail” between the costs and the recharges and (b) there has to be sufficient correlation between what a member pays and the value of the service it receives. This is confirmed by the First Tier Tribunals decision in West of Scotland Colleges Partnership [2014] UKFTT 622 (TC) (Decision No TC 03746).

CSGs can make supplies to non-members and in these circumstances the normal VAT rules apply and a profit element may be included.

An expense can normally be defined as a cost incurred to generate revenue and would include for example:

  • cash payments or liabilities
  • cash flow for cash advances for asset purchases
  • costs incurred but not yet invoiced (accruals)
  • amounts required to meet anticipated future expenditure
  • depreciation in the value of the CSGs fixed assets – where the assets have been purchased by way of loans from its members, the loans can be realised as an expense on depreciation (see CSE3940)

How such costs are calculated and charged is a matter for the CSG members to agree. However, HMRC expects CSGs to have a clear audit trail that can be checked if necessary.