Tax on outsourcing from 2010
Jinfo Blog

19th October 2009

By Tim Buckley Owen

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Outsourcing in the financial services industry is set to become a little more costly from the start of next year following changes in the rules on value added tax coming into force on January 1. According to advice from Eloise Walker, a tax specialist at law firm Pinsent Masons, back office services provided from outside the European Union will be deemed to have been supplied from the country in which the recipient is based – and therefore subject to VAT. Services such as banking and insurance are largely VAT-exempt, the briefing published in the Out-Law newsletter points out, so the change in the rules will have little impact on their direct services. But this reversal of the ‘place of supply’ rule under the Finance Act 2009 means that a UK financial services company that buys in business-to-business services from outside the EU will be required under the ‘reverse charge mechanism’ to effectively act as both supplier and customer, charging the VAT and recovering it ‘to the extent that it can’ (http://digbig.com/5bakyc). After quality of work, cost emerged as the biggest concern for those not currently outsourcing, according to a survey conducted this summer by FreePint VIP in partnership with outsourcing specialist Integreon. On the other hand, those who were already outsourcing were generally pretty satisfied with the outcome (http://www.vivavip.com/go/e21359). But this reversal in the tax rule may cause some change of heart. Examples cited in Schedule 36 of the Finance Act as being caught by the new rule include: website supply, web hosting and distance maintenance of programmes and equipment; supply and updating of software; supply of images, text and information, and the making available of databases (http://digbig.com/5bakyd). In its own survey of outsourcing last June, Pinsent Masons itself reported that relatively few businesses were asking their outsourcing vendors to retender this year because of the cost associated with the process – but it added that sourcing costs were likely to move up the agenda as the recession bit (http://digbig.com/4yyrq). This new tax rule means that, for the financial services sector, the need may be more urgent than most.

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