To Be, Or Not To Be A VAT Sharer?

When it was first announced in December last year I blogged about the froth of excitement (and I use that word advisedly) that the issue of VAT sharing might cause among Registered Social Landords. Nearly three months later and I’ve calmed down enough to form some more concrete conclusions about the role that VAT sharing could potentially have in the coming months. I’d like to make an offer to readers of this blog and followers on Twitter. I’m looking to get your thoughts and opinions on VAT sharing and I wonder if anyone would find it useful to join us in getting an external expert on the issue to construct a useful model that we could follow – if you want in, or you’re just such an expert let me know.

Will sharing be as popular in the offline world?

As I see it the big change is that the disincentive to commission others to provide services that existed for RSLs (and other organisations who generate a VAT-exempt income) has been removed. The mechanics are complicated and doubtless lawyers and HMRC will have some good tussles over how schemes can and cannot be set up, but in essence, the 20% financial penalty of commissioning another RSL to provide me with a service should now be avoidable. Clearly, this opens up a range of possibilities.

Doing things collaboratively to achieve better quality outcomes. It's the age-old discussion about whether it's better to have a smaller service in-house, or to band together with others and create a bigger, supposedly higher quality, service. This debate has raged since before the days of outsourcing regarding whether it actually delivers better outcomes and there's still no real consensus - in some cases it does, in some it doesn't.

Doing things at a larger scale to become more efficient. Instead of using the value generated by collaborative endeavour to improve quality, it could be used to reduce costs. This is the classic “economies of scale” argument, much loved in the public sector at just the time when its weaknesses are starting to show in the corporate world. You will know I’m not generally a fan of “bigger is better”, but under a VAT share agreement on repairs for example, I wonder just how much might be saved.

Agglomerating activities to a scale where other added value outcomes can be considered. Take printing as an example. We all use external printers, but small individual commissions have neither the buying power nor the added value potential of a collective approach. If this was joined together to funded a collective print set up, could we use this new organisation to benefit other groups. One immediate application of this is the potential training possibilities - just think of the number of apprenticeships that could be offered in such a set up. How much easier might it be for something owned by us all, but branded as none of us, to secure contracts from other customers? This is one case where collaboration would definitely help the creation of social enterprises.

Of course, the real crux of whether VAT sharing can be made to work is on how efficiently and productively we can learn to work with other organisations. Providing there was a reciprocity here – each giving up some thing but also getting something back in return, some of the barriers might, just might, be overcome.

So what are those barriers? The primary issue will be a loss of control. Would I really want a vital service to be taken care of outside of the organisation? Would an external body, even one partly or wholly owned by Trafford Housing Trust, really be as sensitive to our organisation’s needs? Whichever way you look at it, sharing is more complex than staying independent. Add to that the issue that within an organisation there is likely to be significant resistance to change – so the disruption any sharing activities caused would need to be factored in.

Finally, it introduces a new governance overhead; the organisations providing these joint services would need to be separate to our existing ones (although if I’ve read the exemption correctly, they could be owned by one or more of us) and we all know how governance overheads tend to have their crises from time to time. So, as ever, there are pros and cons and it might end up that the incentive to experiment is not rewarded by the products that emerge. I’d very much like to investigate further though, so who fancies joining in some bold new thinking about VAT sharing?

How I Learned To Stop Worrying And Love VAT

When I was younger, there were always two things that I just couldn't be bothered to understand: Pensions and VAT. Obviously, as the years have taken their toll, I've found my interest in pensions has naturally increased, but I've still never managed to get that exercised about VAT. So it was amusing to me that George Osborne's statement this week had something interesting to say on both these topics - things that may yet turn out to have real organisational significance for Housing Associations.

Naturally, it was Osborne’s mention of pensions that grabbed the headlines. The three main points were that people would have to work longer before they got their state pension, that public sector pensions would be lower than historically has been the case and finally that pension funds would be investing in large infrastructure projects. Of these, the first two were merely re-statements of very clear trends that had been well trailed. But the news that pension funds will increase the scale of their direct funding of our roads, railways and hospitals of the future (you’ll notice that housing wasn't on that list) is more engaging.

Given that we now have six, not four, years of planned public sector retrenchment (or "cuts" as we’ve grown to know and love them) and that the banks are now in the business of building balance sheets rather than advancing long-term capital, we perhaps should be saying, "thank goodness someone is prepared to invest." That said, I'm sure it won't replace the cut public expenditure, I'm sure that over the lifetime of this parliament that infrastructure will depreciate by more than the additional investment made; but nonetheless in the current climate any new source of private capital must be greeted with enthusiasm. Now all we need to work on is getting that kind of institutional backing into affordable housing.

So the pensions may have been the lead story, but (and this is a sentence I never thought I’d write) it’s VAT that is the exciting part. Specifically, the catchily-titled "cost-sharing exemption", through which organisations that are exempt from VAT (like most Housing Associations are for the majority of their activities) can share activities without having to charge the other organisation VAT on those activities. With VAT now at a record 20%, that's no small saving and I predict it will have two impacts within our sector.

Firstly, it will reduce the imperative to merge as that will no longer be necessary to avoid paying VAT on services provided between organisations. Secondly, it will increase the imperative to collaborate in cost-sharing arrangements with other exempt organisations, as by doing so there is the potential to avoid 100% of the VAT that would otherwise be payable. I know that a lot of the detail of this has yet to be worked through and it may well be some time before we see how the exemption gets put to use, but let’s imagine for a second what might it offer.

Of course, the "scale-brigade" will immediately leap to shared back office services. If only their passion for agglomeration was matched by the level of evidence that it really does generate efficiencies! Interestingly, some press reports claim that it is an exemption specifically for back office services - whereas the HMRC Guidance says only that "the services supplied by the group to its members must be ‘directly necessary’ for the members’ exempt and/or non-taxable supplies." While back office sharing might benefit from this exemption, there has to be plenty of scope within it for organisations to be much more creative than simply creating call-handling factories, where any theoretical cost-per-call benefits are wiped out by increased call volumes - because the factories focus on the cost of each call, not solving the reasons for the call in the first place.

Could there, for instance be a route here to mutual specialisation, where two Housing Associations form a cost-sharing vehicle with the aim of Housing Association Number 1 becoming an expert in say Development, while Housing Association Number 2 becomes the expert in Maintenance? Could there, too, be a route to much better neighbourhood management, with Housing Associations with dispersed and fragmented stock in a given geographical area being able to appoint on-the-spot managing agents without incurring the current 20% VAT penalty? And, in a sector that is notoriously insular, is this the mechanism through which the Housing Association world can return to its roots and its values and re-establish productive, creative and VAT-free partnerships with Community and Voluntary Sector organisations?

There’s no denying that it’s been a week of unremittingly grim economic news, however, I can’t help but wonder what my younger self would have made of the fact that it's VAT that got me smiling again.