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By | OUT-LAW.COM 15th October 2009 11:44

Financial firms face tax bill on outsourcing arrangements

Value added shocks

Banks, insurance companies and other financial services providers who outsource administrative functions abroad could be hit by changes to the VAT rules coming into force on 1st January 2010.

Under current rules, where services are provided by one business to another, the place of supply for VAT purposes is generally deemed to be the country where the supplier is based. If the services are supplied from outside the EU, no VAT will be payable, reducing the overall cost of the supply considerably.

The provision of finance-related services, such as banking and insurance, is largely VAT exempt. The default "place of supply" rule, however, applies to many outsourcing situations where back-office administration is provided outside the UK.

But the rule has been reversed by the Finance Act 2009. As from 1st January 2010, the place of supply in a business-to-business context will be deemed to be the country where the recipient is based.

This means that a UK company outsourcing functions abroad will usually be responsible for paying the VAT under the "reverse charge mechanism". Under this mechanism, the recipient company effectively acts as both supplier and customer, accounting for the VAT as if it were the supplier and then recovering the VAT (to the extent that it can) as the customer.

The rule change is likely to have little practical impact on insurers and financial service providers in relation to their own services, which remain VAT exempt. But they may find themselves having to account for VAT for the first time on the costs of administrative work outsourced outside the EU.

Eloise Walker, a tax specialist in Pinsent Masons, the law firm behind OUT-LAW.COM, warned companies to prepare for the change now.

"Financial services companies who outsource work abroad need to carry out a review of their supply agreements in light of the new place of supply rule and consider restructuring arrangements where possible," she said.

"This change is looming large and companies should be seriously considering how to minimise their potential irrecoverable VAT bill going forward," said Walker.

The Finance Act 2009 can be read here.

Copyright © 2009, OUT-LAW.com

OUT-LAW.COM is part of international law firm Pinsent Masons.

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