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VAT changes level the playing field for outsourcing
March, 19th 2015

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Government outsourcing is expected to increase after the coalition removed VAT charges for private sector bidders on public sector contracts.
The Business Services Association, which represents 63 companies including BT, Serco, Sodexo, G4S and Balfour Beatty and had campaigned for the change, declared it a “big win”. Mark Fox of the BSA, said the move was a significant boost to the industry.

Traditionally, it has almost always been cheaper to deliver services “in-house” because external providers had to add 20 per cent VAT to the cost of their bids — a charge from which public sector competitors were exempt. Its removal will create “a level playing field,” experts said.

The move — due to be introduced on April 1 — is expected to contribute to a further £13bn of savings by government departments targeted by George Osborne, the
Audrey Fearing, government and public sector tax partner at Ernst & Young, said outsourcing had been hampered by the tax and that outsourcing should increase following the changes. “This opens the way for public sector bodies to explore innovative ways for reducing the cost of delivery, by sharing back office functions, or indeed outsourcing to third parties who can drive greater economies of scale,” she said.

Outsourcing companies already benefit from rules introduced in October 2013 that made it easier for public sector employees to retain access to their state pension scheme when they transferred to the private sector.

Government outsourcing has doubled to £88bn since the coalition came to power in 2010, compared with the previous four years. Last month 10,000 probation staff were transferred to private sector employers including Interserve and Sodexo.

Meanwhile coalition reaffirmed its commitment to the privatisation of public services by outlining more than £20bn of asset sales to complete over the next year.
“This opens the way for public sector bodies to explore innovative ways for reducing the cost of delivery

That target includes £9bn of shares in Lloyds, the part-nationalised bank, and £13bn of mortgage assets held since the rescue of Northern Rock and Bradford & Bingley.
The government has already disposed of a £9bn stake in Lloyds, floated the Royal Mail and sold the Tote.

With a further £20bn sales in train for 2015/16, the government was “on track to meet this target early and significantly exceed it”, the Budget statement said. It pointed to the £757m sale of its stake in Eurostar and the £20m sale to Capita of the Food and Environmental Research Agency as examples.

Chancellor George Osborne’s sixth Budget takes place less than two months before what is shaping up to be the most unpredictable general election in living memory

More than 2,800 top-grade engineers — who service military equipment including aircraft at the Ministry of Defence’s Defence Support Group — are also expected to lose the right to their civil service terms on April 1 after the agency was sold for £140m to the outsourcer Babcock.

Other recent deals included the sale of stakes in ConstructionLine, the state-owned construction-industry database, to Capita for £35m in January, and the sale of Greencoat UK Wind, a fund that invests in wind farms for £52m.

Progress is also continuing towards the sale of the government’s stake in Urenco, the uranium enrichment company, the pre-2012 Income Contingent Repayment student loan book, for which it expects to receive £12bn, and public sector spectrum, the government said.

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