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HMRC U-turns on VAT rules for cloud

Good news for SMEs and cloudy buyers

HMRC photo, Gov.uk

HMRC has U-turned on its proposals to hand out VAT refunds just for large system integrators, while forcing public sector bodies purchasing off-the-shelf "cloud" services to pay the full whack.

Last year the body published guidelines that would effectively penalise public sector organisations for buying cheap, standardised off-the-shelf cloud services by providing a tax disincentive for those that do.

However, under the new Contracting Out Services guidance [PDF] published this week, cloud services are eligible for the VAT reclaim. Hardware purchases are not subject to the refund, unless they are provided as part of a managed service.

Kenny Lee, tax expert at Liaison, welcomed the relaxation of the rules in relation to managed services: "There’s quite a few areas for additional recovery so [it's] probably not as draconian as we thought it might be," he said.

"If procured sufficiently, there are huge potential savings."

The new rules also make provision for a "disaggregated" managed IT service, where the various areas of IT such as hosting and networks are broken up into multiple suppliers.

Lee said the backtrack followed representations from the public sector to HMRC that the rules would amount to back-door cost-cutting - particularly in the NHS, which spends several billion on IT each year.

The rules specifically stated 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.

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