Britain's decision to clamp down on those avoiding payment of value-added tax would not come in the way of firms which outsource services to countries like India, officials said on Thursday.
"The government has looked carefully at least twice at the issue and could find no evidence that VAT is a critical factor in outsourcing decisions," a spokesman for the Treasury said.
"When we take action to stop blatant VAT avoidance, we do not expect this to affect the market for outsourcing."
The contested VAT grouping rule is designed to help large companies by freeing them from paying VAT on intra-company services, but it is not meant to cover outsourcing to a separate company. The industry argues that if the service had been kept in-house, companies would not have to pay the VAT, so they should not have to when outsourcing.
Taken together with the closure of other VAT loopholes announced on Wednesday, the Treasury estimates that it will receive an extra £400 million in tax receipts over the next three years.
Companies which outsource their services are exploiting VAT regulations on 'grouping' to avoid paying the tax. Customs and Excise has been trying to stop the practice, but the government is poised to start consulting industry about legislation to make it tougher to avoid VAT through this route.
