New British budget proposal to hasten outsourcing to India

Friday, 12 December 2003, 20:30 IST
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LONDON: The fine print of the pre-budget report presented by Chancellor Gordon Brown reveals that new proposals are likely to push more British firms into outsourcing work to India and other countries in Asia. The proposals involve a major clampdown on companies that avoid value added tax (VAT) and are intended to save millions of pounds for the exchequer. The main VAT avoidance scheme that will be closed off by the Treasury is an arrangement that allows banks and insurance companies to avoid the duty on operations that are outsourced to a third-party service company. Kendra Hann, a partner at Deloitte, the accountancy firm, said the outsourcing industry would lobby hard for the plans to be overturned. "This will drive more companies to India because outsourcing to another country does not incur VAT," she told the local media. "The measure takes away the loophole that was there for companies to mitigate VAT costs on outsourcing. "It may drive the move to India and other cheaper countries further, if the UK outsourcing sector has to charge VAT. Or they may choose not to outsource at all." Hann said the change could affect outsourcing companies including recruitment agencies, IT companies and logistic and support services firms. A spokesman for the Treasury rebutted the argument. "The government has looked carefully at least twice at the issue, and could find no evidence that VAT is a critical factor in outsourcing decisions," he said. "When we take action to stop blatant VAT avoidance, we do not expect this to affect the market for outsourcing." The contested VAT grouping rule is designed to help large companies by freeing them from paying VAT on intra-company services, but it is not meant to cover outsourcing to a separate company. The industry argues that if the service had been kept in-house, companies would not have to pay the VAT, so they should not have to when outsourcing. Taken together with the closure of other VAT loopholes announced Thursday, the Treasury estimates it will receive an extra 400 million pounds in tax receipts over the next three years.
Source: IANS
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