What is outsourcing?

Outsourcing is an arrangement whereby one business entity provides services to another business entity that could be, or usually have been, provided in-house. There are a number of non-tax commercial reasons why a business may decide to outsource some of its services to a third party, which may include reducing operating costs for the recipient entity or to enable the recipient entity to focus on the growth and development of its core business. By way of example, it is common for banks and insurance companies to outsource back-office functions which can be provided by companies specialising in these services and thus benefit from economies of scale.

While the reason for entering into an outsourcing arrangement may not be tax driven, tax considerations will be an important factor in determining whether the arrangement will be cost effective as, if and to the extent that the arrangement gives rise to an additional tax charge, the commercial benefit of the arrangement may be reduced. Ideally, the tax position of the recipient should be neutral pre and post the service being outsourced.

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