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UK public sector outsourcing hit by VAT hitch

An outsourcing study from global law firm, Morrison & Foerster, suggests the UK public sector outsourcing market - one of Europe's largest outsourcing markets - has effectively been shut down by a UK government moratorium on new projects and a review of every existing project for over half of 2010.


Click here to download Morrison & Foerster's Global Sourcing Trends 2011 report (requires registration)


If the existing controls relax in 2011, one potential upside is that new services may have to be outsourced to achieve the target deficit reduction, but the risk is that service providers may prioritise sectors where margins are less squeezed, according to Morrison & Foerster.

The practice of using offshore providers to circumvent VAT has also changed. VAT is based on the location of the recipient of services, not the provider, which, combined with the 2.5% rise in VAT, is making an impact in the UK.

In addition, a longstanding VAT exemption for the insurance sector looks likely to disappear, threatening the business case underpinning outsourcing many claims-handling or insurance intermediary services, Morrison & Foerster reported.

Globally, the law firm reported that using outsourcing to innovate was back on the agenda. Green service levels are also on the rise.

"We are seeing buyers apply energy usage as an evaluation factor in service quality and total cost of ownership calculations; and clients are starting to discuss meaningful service levels around 'green' issues.

"This is an early-stage trend that will increase in 2011, driven by financial reporting requirements, increasing energy costs and, in some countries, statutory requirements," Morrison & Foerster said.


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