Is VAT Destroying your Business Case for Outsourcing and Shared Services?
Noel Cullen, Principal Advisor, KPMG in the UK
Many business cases for shared services and outsourcing in the finance and insurance sectors overlook the substantial impact of VAT.
KPMG’s experience in working with member firm clients in developing their business cases for outsourcing and shared services is that savings of 20 – 40 percent on operational costs within scope are typically achievable. However, whilst the salaries of employed staff do not carry VAT, VAT charges will normally arise on the salary element of the costs of the outsource or shared service provider as part of the service fee, and typically finance and insurance organisations can only recover a small proportion of VAT incurred. With UK VAT at 20 percent and rates of up to 25 percent elsewhere in Europe, the potential cost is high. Accordingly, the increased VAT costs need to be set against the potential savings. If these VAT costs can be mitigated then the business case can be preserved.
The growth of the outsourcing sector has continued apace, even (perhaps not surprisingly) during the recent global recession, as the business case for outsourcing is often based on cost savings of in excess of 30 percent. However, once indirect tax is applied to the outsourcing company’s invoice this business case is greatly diluted if that VAT is irrecoverable.
Consideration needs to take place early on to avoid unexpected VAT costs.
You need to consider both the sourcing model design and the indirect tax position to be able to ensure your organisation’s business case is not wrecked by the VAT costs.
Financial Services organisations should avoid moving to an outsourced or shared services model without detailed consideration of indirect taxes during the design stage. For further information on this subject, ready my full article, How to Use VAT Benefits to your Advantage in Outsourcing and Shared Services.
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