VAT change puts brakes on outsourcing

The government's decision to clarify the VAT exemption relating to financial management services stymies potential outsourcing arrangements between IT firms and financial institutions.

Robert Morgan, executive chairman of outsourcing consultancy Morgan Chambers, claimed banks and insurance companies were keen to outsource their back office functions but could not afford to do so because VAT applied to the provision of external financial services.

He added that services companies already collected VAT on credit management services, but the industry was hoping an upcoming tribunal challenge by First Data Resources (FDR) would reverse the current status and lead to a swathe of outsourcing agreements. Morgan argued the government's move was a deliberate attempt to counteract that challenge.

The change to financial management services comes one week after the Chancellor, Gordon Brown, unveiled a 13 per cent rise in duty for UK fuel costs, placing distributors in the position of not being as competitive as their European counterparts (PC Dealer, 17 March).

But Morgan claimed the move contradicted a recent Danish court ruling that found European law dictates that specific outsourced essential financial services functions must 'remain exempt' of VAT.

He said: 'This is a pre-emptive strike taken ahead of the FDR case which, it is generally thought, the government would have lost.'