Outsourcing Tax for financial service providers in EU
November 25, 2009
Come January 1, 2010, with the proposed changes in the VAT rules, UK’s financial service companies would no longer be able to enjoy the tax breaks for outsourcing.
Under the current rules , when the supplier of a financial service is based outside of the EU, no VAT is applicable. Until now, this was a huge incentive for UK firms to offshore to low-cost destinations.
However from January 1, businesses with wholly or partially exempt VAT status (Typically, businesses in the financial or insurance sectors) will come under the purview of the new tax rule. Interestingly, the new rule will not impact EU companies with regard to their own services, if they are already VAT exempt. However, they would still have to account for VAT on the costs of administrative work outsourced to service providers outside the EU, which smacks of a deliberate policy attempt at curtailing the outsourcing trend.
Undoubtedly, the new rule will also impact vendors. Companies would deal with this issue by amending their existing SLAs to transfer a portion or the whole of this financial burden to their vendors. This means a further squeeze on the vendors’ profitability. A few may even be tempted to de-scope certain services or change the offshore location, which means a termination of the existing contract.
Either way, both clients and vendors need to be prepared for the change and negotiate a fair bargain that doesn’t hurt either party’s interests. For a detailed understanding of how this might affect your business, log in to this site.
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