From 1st January 2010 EU businesses will have to account for the reverse charge to VAT on the cost of services provided from offshore locations outside of the EU as a result of the Finance Act 2009.

Under current legislation the place of supply for VAT purposes is deemed to be the country where the supplier is based. If a supplier is based outside of the EU there is no VAT liability.

The new regulations define the place of supply as the country where the recipient is based. This means that a UK company who has offshored outside of the EU wiill usually be responsible for paying tha VAT under the "reverse charge mechanism".

Financial or insurance sector businesses with a wholly or partially exempt VAT status will not be able to fully reclaim this VAT. This could have significant cost repercussions on the cost of offshore IT services.

What should financial services and other exempt sector businesses be doing now?

If your business has not already done so you will need to make provision for this increase in next year's budget. However, you may be able to take action to mitigate these effects if your individual contracts allow this. Now is the time to carefully examine your contracts.

If your in-house teams do not have the skills or bandwidth to review your offshore contracts, Altica can help. With our associates we can assist in identifying any contractual opportunities to mitigate the VAT liability, help in contract negotiations and also advise on strategic opportunities to help you minimise these extra costs in the long term.

If you would like to explore ideas on reducing the cost of your offshore contracts email .