CSE4120 - How the conditions are to be interpreted: Distortion of competition: How can the exemption lead to a ‘distortion of competition’?

You should check the other guidance available on GOV.UK from HMRC as Brexit updates to those pages are being prioritised before manuals.

A CSG is a cooperative self-supply arrangement. It is not a commercial outsourcing arrangement therefore it does not exist or compete in a market.

The reason why CSGs cannot include overseas members is because of the potential to cause distortion in the market against UK providers of similar services caused by divergence of treatment in the different countries. This was also the conclusion the Advocate General gave in her Opinions in DNB Banka (case C-326/15) and Aviva (case C-605/15).

There is a distortion of competition where there is a genuine risk that the VAT exemption itself would give rise to distortions of competition. The fact that the CSG satisfies the other conditions for exemption, such as the requirement that it charges only an ‘exact reimbursement’ of costs, is not relevant. This was confirmed by the judgment in the case of Taksatorringen (case C-8/01) and remains the position after 31 December 2020.

In that case, the Advocate General considered that exemption from VAT should not be refused simply on the grounds that the exemption might produce distortion of competition, unless it appears with at least a high degree of probability that it would of itself exclude independent operators from carrying on business in the market in which the group is operating.