HMRC mark U-turn on VAT for IT Managed Services

HMRC appears to have done something positive for a change in a way that will be welcome news for IT Managed Service Providers.

Last year, HMRC advised that only large system IT integrators would get a VAT refund for aggregated purchases. Public sector organisations were thus being penalised for buying standardised ‘off the shelf’ Cloud services and having to pay the full amount of VAT on purchases.  An unjust penalty where transparency and best price are being argued for by the regulators.

However, following representations to HMRC from public sector bodies which spend several billion pounds per year, happily HMRC have done a pleasing U-turn on VAT refunds. The new document published this week, ‘Contracting Out Services’ guidance, shows that cloud services are now eligible for the VAT reclaim. Hardware can be considered but only if part of a managed service bundle. The new rules also support a “disaggregated” managed IT service, where the various areas of IT such as hosting and networks are broken up into multiple suppliers.

The rules specifically state that the following services should be included in the VAT refund:

• Hosting Computing Services
• Archiving Communication Services
• Data Communications Services
• Desktop Communications Services, for example Picture Archiving Services (PACS)
• Ethernet cable/Data lines and Cloud computing

With the new G-Cloud 7 Digital Marketplace providers to be announced in November to compliment the public sector tendering frameworks, the Government’s linking of a transparent approved supplier system and joined up thinking on tax for public sector buyers will make a positive change for SMEs and their clients on tightened budgets, especially in the downtrodden NHS marketplace.  The latest sales reported for G-Cloud are £753million, with 51% in value and 60% in volume going to SMEs (defined as sub 250 employees with annual turnover not exceeding Euro 50 millions).  77% of total sales by value were through Central Government, with 23% through the Wider Public Sector.

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