Times are becoming tougher for everyone, including public sector organisations and charities. There is a relentless focus on reducing costs. With no signs of respite on the horizon, how can the Chancellor help organisations to deliver public service aims and charitable objectives more effectively?
One ray of hope exists in VAT law. Britain is scheduled to implement the “cost-sharing exemption” already available in other European Union states. At present any charge between independent entities for sharing services generally incurs a VAT charge. The new measure enables organisations to not charge VAT when sharing services on a not-for-profit basis, allowing collaborative working arrangements to be more cost-effective.
Without effective implementation of this measure, the scope for cost reductions is limited. “Salami slicing” costs for services can only achieve so much; reducing headcount can result in a loss of organisational knowledge and overstretched resources. Determined to protect service quality, leaders are increasingly aware that overcoming these challenges requires a completely new approach.
Attention has turned to more innovative models of collaborative working. This could be anything from sharing a chief executive to outsourcing an IT function. Shared resources achieve significant economies of scale while safeguarding knowledge and experience. With careful management such models improve the stakeholder experience. But without the cost-sharing exemption, this VAT cost can tip the balance between a decision to retain services in-house and taking the brave step to enter into otherwise more efficient collaborative working arrangements.
Despite being a mandatory provision of EU law, there has been frustration that Britain has not implemented the exemption. As a result, plans to introduce cost sharing through restructuring have been put on hold by many organisations, arguably slowing down the efficiency drive. The introduction of legislation later this year provides a timely opportunity for the Chancellor to provide a catalyst to public and third-sector organisations in revolutionising how they procure the services they require.
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There are still some issues to be addressed. While news of the implementation has been well-received, some concern has been raised that further information on its practical application will be given through non-binding guidance rather than secondary legislation. It will also be necessary to navigate the corporation tax and legal implications. For example, unless a cost-sharing entity could be argued to be outside the scope of corporation tax or established as a mutual trading company, careful structuring will be required to avoid corporation tax being charged on any perceived profits arising from the services which would create an additional cost. Nevertheless, this could be a big step forward. The hotly anticipated supporting guidance will be pored over to see how much support is available to a sector which has been encouraged to reduce costs without affecting the delivery of services.
• Chris Morgan is head of tax policy and Anant Suchak is head of public sector tax at KPMG