VAT changeback to cause potential blackspot for FDs

Contracts up for renewal still have scope for renegotiation and further savings, says Doshi ­ and FDs may want to revisit benchmarking and open book rights with outsourcing contracts, so they can assess where their contracts are in the marketplace.

Many companies argue that their arrangements are sufficiently circumspect to avoid being caught out. “Virtually all services received by AXA from third parties outside the UK already fall into the ‘defined categories’, as UK VAT has always applied to such services,” explains Tony Greenman, senior manager of group tax at AXA. I don’t anticipate any new, material VAT cost or procedural change to arise.”

Martin Scott, FD at regional brewing and pub company Hall & Woodhouse, says his is one such business. From a systems point of view, the changeover will be a simple matter. “Luckily our technology is up to date. We have just put in a new accounting system. The change in VAT is very simple and doesn’t have to be implemented at midnight because [the system] is not customer-facing,” he says.

Putting prices back up to compensate, however, is not an option, with consumers still hard-pressed. Hall & Woodhouse will not be able to start charging more on food and drink on 1 January because consumers are still spending conservatively. “Going into January there is a bit of a fear that the VAT change will have quite a significant impact. The chance of getting a price increase through to consumers in 2010 is zero. The high days are good, but there is a compact spending pattern overall. People aren’t going out more than once a week. So we have got to grow turnover by 2.5% before we even start.”

Dario Garcia, head of VAT and transfer pricing at Barclays, thinks the changes won’t affect the decision on whether to outsource or not, but might in marginal cases cause organisations to look closely at costs between Indian suppliers and those in Eastern Europe, for instance.

Not a bad exercise for cost-conscious companies anyway. But from a systems point of view, the changes actually simplify things, he says. “You don’t have a classification issue. Everything is coded as reverse chargeable.”

Garcia thinks the VAT increase is more of an issue for the banks. Commodities trading, commercial leasing and other property transactions will all be affected by the rate rise, but by and large, the measures taken when the rate went down will stand the finance function in good stead. “We obviously kept that change programme alive because we knew the rate was going back up. And who is to say it won’t go back up again.”

VAT cut: much ado about nothing?
In a recent survey of KPMG clients, 83% had a high or very high awareness of the rate change and 88% were confident they would meet the deadline.

Respondents were less happy, though, as to the success of the reduction measure, as implementation has not been cost-free.

Around 61% said benefits such as driving increased sales, for instance, had not outweighed the costs of compliance – and 60% said they would not be able to pass on those costs to customers.

The tax authorities will be keen to get back to business as normal. According to HM Treasury, the 2.5% reduction has cost the Exchequer an estimated £12bn over 12 months.

For more on the changes to outsourcing, go to
www.hmrc.gov.uk/VAT/ec-sales-lists.pdf