In the 2015 Budget, Chancellor of the Exchequer George Osborne removed VAT charges for private sector bidders on many public contracts.

From 1st April 2015, non-departmental public bodies and privately owned service providers will be eligible for VAT refunds when they procure services and operations from the government.

The government has gone into more detail regarding this change in policy on its website, which specifies that: ‘There has been no provision to refund VAT to non-departmental public bodies sharing services with their parent department or between themselves… With the expected wider take-up on shared services, the government wishes to ensure that these bodies are not at a VAT disadvantage when they enter into such arrangements.’

The website also clarifies why private suppliers are included in this policy change: ‘Because of competition issues, this will also include situations where they procure an eligible service directly from a private sector provider.’

Government departments are expecting to save £13 billion as a result of these changes. Further government outsourcing is also anticipated – the amount the government spends on outsourcing has already doubled to £88 billion since 2010, when the coalition government first took power.

Audrey Fearing, a partner at Ernst & Young who is involved in government and public sector tax, said: ‘this opens the way for public sector bodies to explore innovative ways for reducing cost of delivery, by sharing back office functions, or indeed outsourcing third parties who can drive greater economies of scale.’

Kerry Hallard, CEO of the National Outsourcing Association, had high praise for these changes. She said: ‘We applaud this common sense initiative from the government. The coalition has already invested £88 billion into outsourcing; they have done so because they know it works.

‘The introduction of VAT refunds for suppliers will enable many more public departments to take advantage of the cost savings and service improvements that outsourcing can provide. As a result, we expect this change to bring significant growth to the outsourcing industry.’

However, Hallard also warned that government departments will need to shape up in the way that they manage their outsourcing contracts, if they’re going to make their new outsourcing deals effective.

For weekly news updates, subscribe to our email newsletter.

Read this next: Facilities Management Outsourcing Expected to Grow by 5%