What will the shenanigans at Westminster mean for outsourcing?

The new regime is likely to prove taxing for offshore IT...

The new regime is likely to prove taxing for offshore IT...

Changes to VAT rules and immigration policy could end up hurting the offshore IT industry, says Mark Kobayashi-Hillary.

I didn't really want to write about politics again so soon, after commenting on the leaders' debates just a couple of weeks ago, but I'm constantly being asked for my views on what would have been the best election result for the offshoring community.

It would be sensible to assume that IT suppliers want to see offshoring made easier. But in the present business-friendly climate what could be made easier?

Three letters. Tax. Stay with me, I know tax is a dry topic but I'll make this painless.

The EU changed the VAT regime on services supplied from outside the union at the beginning of this year, meaning many offshoring clients suddenly had to start paying VAT at 17.5 per cent to their supplier when they were used to VAT-free offshore services.

That change makes a big difference. Imagine if an internal business plan had proposed that offshoring might reduce running costs by 20 per cent - that saving has now been wiped out overnight.

But this is not about to change anytime soon. In fact it's highly likely that the new government will increase VAT rates - 20 per cent is the rate pundits are talking of - because it's a tax that only hits those who spend. If you can't afford to spend, then a VAT rise won't affect you that much anyway.


Changes in VAT will hit offshoring
(Photo credit: Shutterstock)

But it will hurt the offshore suppliers, who will probably be forced to continue charging the same rates and absorb the tax regime changes by reducing their profit margins. No one in the UK is going to be crying into a more expensive pint glass over Indian tech firms having reduced profit margins though.

Offshoring has not been a campaign issue in this election anyway. In 2005, it was seen as important for all the candidates to have a position on the issue of companies hiring in other countries in preference to the UK. Now, even the government is offshoring public sector work on NHS finance and stakeholder pensions so it's hardly likely that a new administration will come out against it. With the expected cuts coming soon, it's likely far more public sector projects will be offshored.

Some minority parties, such as UKIP or the BNP, have been critical of offshoring, but that's more from a standpoint of xenophobia. The BNP has offered foreign-born people £50,000 to leave the UK and UKIP wants us to withdraw from the European Union, so it's no surprise they don't want companies or government to work with firms in India or Brazil. But these small-minded small parties have been roundly rejected by the electorate - with BNP leader Nick Griffin beaten into third place in Barking.

Immigration is one genuine area...

...where the new government could make life more difficult for the offshoring community. The Labour party had worked with international trade bodies such as Nasscom, India's hi-tech trade organisation, to agree pragmatic measures that would support the IT industry. The Liberal Democrats have made similar unthreatening noises, but the Conservatives have talked of specific caps on immigration numbers, which could be a real threat if applied.

Why? Because every year, companies from all over the world do business with companies in the UK and need to bring in their teams from across the world to make that happen. It might be as part of an offshoring programme, or it might be that experts are available in one place immediately and impossible to find locally.

Visas are granted to these migrant workers, even for temporary projects, so what happens if there is a specific cap on SAP experts and that limit is reached by September? Should any new project wait until the following calendar year?

Caps on immigration are populist and clearly don't work in an environment where skills need to be traded across national borders. So in summary, the new government will probably raise VAT, won't be able to change the EU VAT rules, and will offshore more government services, but the Conservative immigration caps could cause real difficulties for the international IT services market.

Mark Kobayashi-Hillary is the author of Who Moved my Job? and Global Services. He lectures at London South Bank University.