Outsourcing jeopardised by Customs.

Fears are rising that threats by Customs & Excise to clamp down on VAT grouping arrangements could cost UK business £250m a year and wipe out the benefit of many outsourcing contracts.

There has been outrage over Customs’ publication of plans to ‘protect’ revenue from VAT groups, which has been followed by letters to large corporates with subsidiaries in additional fields demanding further information.

Accountants have warned the decision could cost outsourcing companies £250m a year in lost business from the finance sector.

When a business outsources back-office functions, it usually creates a VAT cost which can make the entire deal uneconomic. Some companies, with the help of their accountant, structure their affairs to take advantage of the VAT grouping relief which can eliminate all or most of the VAT.

But a Customs spokesman said companies would be thrown out of VAT groups if they were found to be contrived for tax avoidance. He said: ‘We are not happy with large businesses exploiting VAT.’

He denied outsourcing would become less attractive, adding: ‘If a company has been involved in outsourcing to avoid tax, tough. If the decision was business-based there will be no problems.’

But John Kennedy, VAT partner at Deloitte & Touche, said: ‘The decision is going to wipe out the benefit of many outsourcing contracts and have a major effect on outsourcing.’

The Royal Bank of Scotland said it was waiting to see what action Customs took, but pointed out VAT grouping cut the tax agency’s administration costs.

One in ten FDs to outsource, page 3.

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