Shared services VAT costs are a major obstacle to effective collaboration, an alliance of organisations has warned today.

The National Council for Voluntary Organisations (NCVO), Charity Finance Directors’ Group (CFDG), Universities UK and the National Housing Federation are warning HM Revenue and Customs that the VAT charge on shared services acts as a massive barrier to collaboration, preventing efficiency savings and more effective working arrangements.

This is at odds with the government’s drive to get more organisations working together, especially against a backdrop of austerity and funding reductions.

HMRC are currently consulting on implementation of a cost sharing exemption available to charities which is mandatory under European law.

However, the organisations caution that in its proposed form the exemption is likely to be of little use to the charity sector, particularly smaller organisations who in many cases could benefit the most from cost sharing.

Sir Stuart Etherington, chief executive of NCVO, said: "The government needs to look at the wider picture and seize this opportunity to address what is a longstanding issue for charities.

"Collaborative working not only delivers cost savings, but it also helps charities to provide better services with service users’ needs in mind.

"We know that there is appetite within the sector to work together more effectively and efficiently, especially in these challenging economic times. It now rests on Government to ensure that collaborative working is a worthwhile and straightforward venture open to everyone."

Caron Bradshaw, chief executive of CFDG, said: "VAT on shared services is a huge issue for charities and has been raised repeatedly by our members over the years.

"It is yet another example of how charities do not operate on a level playing field with the public and private sectors, who often share services to keep down costs.

"Under the current system, shared service arrangements must generate savings of at least 20 per cent to cover the VAT charge, plus enough for the substantial start up costs, to be worthwhile. This means that many charities with specialist staff and expertise cannot sensibly share these with others, and so potential cost savings are lost.

"While it is no panacea, the exemption is an important part of the solution. We fear that as it currently stands the exemption will do little to address the problem and an important opportunity will be missed."

Nicola Dandridge, chief executive of Universities UK, said: "Universities are committed to working more efficiently while continuing to provide an excellent learning experience for students and supporting world class research.

"Shared services are one of the ways in which institutions can reduce costs, improve the quality of services and release much-needed resources to support core activities of teaching and research.

"However, current VAT rules make this difficult and we urge the government to act on the recommendations of the Universities UK Efficiency and Modernisation Task Group and implement the cost sharing exemption.

"This will incentivise greater collaboration and more efficient working within the sector, and create opportunities for organisations working in different fields to innovate and share services."

David Orr, chief executive of the National Housing Federation, added: "Many not-for-profit organisations want to work in partnership, want to improve their services and want to save costs - but know if they do so they will be hit with an additional VAT charge.

"Ministers need to ensure that there is sufficient flexibility in the arrangements to enable as many organisations to benefit from the exemption as possible. This means ensuring that the proposals are commercially and legally achievable and that the administrative burden of complying with this exemption is not too significant a barrier to make this measure a benefit for housing associations."

The organisations also warn that the issue of irrecoverable VAT leaves charities at a massive financial disadvantage compared to other sectors and further disincentivises collaboration.

The HMRC consultation on VAT cost sharing exemptions closes today, with feedback expected in the autumn.

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