The CJEU has upheld the Commission’s complaint, finding Luxembourg’s implementation of the cost sharing exemption to be ultra vires.
The Court of Justice of the European Union (CJEU) has agreed with the Advocate General (AG) that Luxembourg’s law on the cost sharing exemption in Article 132(1)(f) is ultra vires. There were three things the Commission complained about. It is the first ground that is of the most relevance to the UK, and indeed of most interest. Luxembourg allows a Cost Sharing Group (CSG) to exempt any qualifying service to a member who has taxable activity as well as exempt and/or non-business activity, as long as the level of taxable activity is no more than 30 percent (or 45 percent in some cases). These services are viewed as directly necessary for the exempt/non-business activity and hence eligible for exemption. This makes the cost sharing exemption easier to manage as most members will have some taxable activity and most of the services a typical CSG will supply will be overhead type services that are used by the members for all their activities.
Paragraph 54 starts by observing that overhead charges by a CSG relate to all of the activities of their members but that a CSG does not necessarily only supply that type of service. The earlier AG cited accounting and exploiting medical machinery as examples of an overhead service (used for all activities of the members) and a non-overhead service directly necessary and used for exempt activity of the members. What is not clear though is whether an overhead type charge can ever be directly necessary for just one (exempt/non-business) activity when the member to whom it is supplied also has taxable activities that will also use that service. The AG thought it could not be directly necessary (effectively equating directly necessary with directly attributable) but the decision is less clear. Presumably though this is not an issue for a wholly exempt member, which may be why the Commission argued that only wholly exempt/non-business entities can receive exempt services. However, that is the only part of the complaint the CJEU did not agree with as the Directive does not say the exempt or non-business activity has to be the member’s only activity.
The paragraph could be read as saying that it is possible for the CSG vehicle to apportion a single support service and apply differing VAT treatments by reference to each member’s taxable and exempt activities (though this seems contrary to normal VAT rules of one supply/one VAT rate unless the law says otherwise) or alternatively create two supplies of the same service made to different parts of the member’s business, with the supply to the wholly exempt sector being exempt. All of this is, however, far more complex than a de minimis threshold.
The rest of the judgment is relatively straightforward. The CJEU says that a CSG is a separate taxable person from its members, so the members cannot view supplies made to the CSG as supplies made to them. The supply is to the CSG, which either claims or disallows the VAT, depending on what supplies by the CSG to members the cost is used to make.
Finally, Luxembourg allows CSG members who incur costs in their own name but on behalf of the CSG to treat the allocation of those costs to the CSG as outside the scope of VAT. However, under EU law a person who, acting in his own name but on behalf of another, takes part in a supply of services is deemed to have received and supplied the services. So the reimbursement of the member by the CSG is a supply within the scope of VAT. Luxembourg allows CSGs to exist by way of contracts, that is to say the CSG does not have to have a separate legal personality from its members. In that context outside the scope treatment makes sense (like the outcome in EDM). However, the CJEU has concluded that a CSG has to be a taxable person, separate from its members.
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