VATFIN1600 | Outsourcing

To reduce costs and increase efficiency, financial institutions are increasingly sub-contracting parts of their work to third parties. This is colloquially known as ‘outsourcing’.

Outsourcing is a contentious area. Financial institutions may seek exemption on the services they buy in, because of their inability to recover input tax that then forms an overhead of their business. This has led to a lot of litigation and uncertainty, but some useful principles are now emerging from Tribunal and the courts.

There is no reason in principle why a sub-contracted service should not fall within the scope of the financial exemption. But many outsourced services may be administrative in nature, rather than services of a financial nature, and will therefore be taxable at the standard rate.

As the ECJ, in its judgment in the case of Sparekassernes Datacenter (‘SDC’ - Case C-2/95 - [1997] STC 932), stated, The [Article 135.1] transactions … are defined according to the nature of the services provided and not according to the person supplying or receiving the services.

Outsourcing for particular services is dealt with in each of the relevant sections. If you are unsure whether an outsourced service is exempt please contact the Financial & Commodities VAT UoE for advice.