Outsourcing is typically to be understood as using outside services to undertake tasks which businesses (or other organisations) may traditionally have performed in house. Outsourcing is commonplace across variety of sectors and industries. The decision to outsource may be attractive for a variety of reasons including cost reduction, increased efficiency and shared risk (to name a few).
Despite its benefits, outsourcing also has the potential to create additional VAT costs where a service provider supplies a service which is subject to VAT to a recipient who, in turn, is not able to recover all of that VAT. This is to be contrasted with the situation where the recipient carries out the service itself in house and suffers no VAT cost. This section focuses on the challenges posed by outsourcing in such circumstances and is therefore particularly relevant to sectors such as financial services, insurance, healthcare and education where the predominance of exempt activities heavily restricts VAT recovery.
Whilst the discussion of outsourcing which follows sets out a number of the key VAT issues that are likely to affect businesses that provide and receive outsourced services, given the breadth of possible outsourcing arrangements it is essential to consider these along with general VAT principles and other business sections.
For ease of reference, businesses that receive outsourced services are referred to in this section as 'recipients' and businesses that provide outsourced services are referred to as 'service providers'.