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HMRC VAT rules cut cloud costs by 20% for NHS and government departments

An HMRC ruling on reclaiming tax on cloud services could drive up the use of off-premise technologies in the public sector

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HM Revenue & Customs (HMRC) will allow NHS and government departments to reclaim the VAT on off-premise purchases.

In bowing to pressure from cloud-championing campaigners, HMRC unveiled a revamped version of its Contracted Out Services guidance, which sets out the range of outsourced services government departments and NHS bodies are entitled to reclaim VAT on.

HMRC has added commodity cloud services to the list – meaning such services will cost 20% less for NHS bodies and government departments to procure as of 12 October 2015.

Former G-Cloud lead Mark Craddock welcomed the decision, having publicly criticised HMRC for excluding cloud services in the past. Craddock has been campaigning to have cloud services added to the list for four years.

Speaking to Computer Weekly, Craddock said the ruling should make it easier for public sector organisations to make a business case for cloud services.

“I did some cost models for on-premise and cloud, and the cost savings are close – but VAT was always the killer,” he said.

“If that 20% VAT wasn’t there, you would say cloud was way cheaper than on-premise, as it made the margins a lot closer and made things difficult when making a business case for cloud.

“On a £1m project, that 20% equates to £200,000, so that’s quite a significant saving,” he added.

Equal footing for cloud providers

HMRC’s U-turn should also level the playing field for cloud providers when vying with the big system integrators for government deals, said Craddock. Previous guidance favoured the latter's way of working.

For example, NHS bodies and government departments could reclaim VAT on bespoke computer software and services designed to meet their own specifications.

These could be delivered either as a managed service or a serviced computer infrastructure, using the customer's or the supplier’s own hardware, for VAT to be reclaimed.

Read more about taxation and IT

Previous guidance explicitly excluded the supply and support of “off-the-shelf” software, which effectively banned public sector organisations from reclaiming the VAT on commodity cloud services.

“One way of looking at is, you can reclaim the VAT on anything you buy through G-Cloud, because it’s gone out to tender, the services are designed to the specifications of the government because they meet specifications around security and data protection,” Craddock said.

“It’s really good news, as it means cloud services will finally be treated fairly and on an equal footing.”

Daniel Jones, senior analyst covering defence and security at market watcher Kable, backed Craddock’s view – but cautioned public sector IT suppliers against getting too carried away with the ruling.

“It’s good to finally see a level playing field. However, vendors shouldn’t be too exuberant since cost isn’t the primary constraint on cloud update in the public sector,” he told Computer Weekly.

“Security is commonly cited as the biggest concern, closely followed by the challenge of migrating from legacy systems.”

Campaign for fair cloud VAT

Craddock is not the only one who has previously queried HMRC’s rationale. Labour MP Chi Onwurah raised the issue with Parliament in February 2015.

In a question addressed to Chancellor George Osborne, she asked if any assessment had been made about the impact HMRC’s refusal to refund the VAT on off-premise services has had on the cloud services market. In response, Onwurah was told it had not.

In a statement to Computer Weekly, Onwurah cautiously welcomed HMRC's revised stance on the issue, before raising concerns about the damage it may have done in the meantime. 

"I’m glad the Government has finally seen sense and decided to match their warm words on cloud services with some action. Their responses to my questions were not very encouraging," she said.  

"I am concerned at the damage done to the sector in the meantime, and the lack of understanding it betrays. The absence of a clear industrial strategy for the digital economy is becoming more and more apparent," Onwurah added.

Computer Weekly contacted HMRC for comment on this story, but had received no response at the time of publication.

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