Outsourcing deals hit by tax change

Financial services outsourcing deals will be hit by an extra #200 million a year in VAT, following a tax change announced in last week's budget.

The move, described by tax specialists Ernst & Young as 'an attack' on finance sector outsourcing, affects the outsourcing of credit and debit card and credit management processing services. One prospective UK deal involving an unnamed French bank with FDR - the leading services house in this market - has already been called off.

Robert Morgan, chairman of outsourcing consultancy Morgan Chambers, warned of a 'devastating' impact on key suppliers.

Banks do not charge or pay 17.5% VAT on their core business, and as a result cannot normally claim VAT charged by suppliers such as IT outsourcers.

However, this has not applied in some cases - a loophole which was tightened in the budget.

The Treasury says that the tax change will net #75 million a year, but Morgan Chambers puts the figure at about #200 million.

Deals which could be affected include Lloyds TSB and HSBC's outsourcing of card processing to FDR, and EDS's deal with the Royal Bank of Scotland.

Ernst and Young believes that the change is contrary to European Union law. A Danish IT supplier to local savings banks won a recent case, exempting it from charging unclaimable VAT.