What the Coalition means for outsourcing: Immigration, Skills & Tax

With the new Coalition government comes a new state of play for outsourcing, both for organisations in the UK using outsourcing, and outsourcers themselves. Firstly, there’s that immigration cap that was the Conservatives’ poster policy.

Home Secretary Theresa May announced earlier this week that there will be a 12-week consultation to decide on the permanent annual limit on non-EU immigrants entering the UK. Naturally, it is too early to guess what that limit will be, but Prime Minister David Cameron said this week that the net immigration level would be reduced from 176,000 per year to “tens of thousands;” a significant decrease.

So, what does that mean for outsourcing from non-EU states, such as India, where the IT outsourcing business has boomed? Well, the jury is still out. Some India outsourcing firms have reacted angrily already to the news that only 24,000 non-EU professionals will be able to the UK until April 2011. Amit Kapedia, Director of the Highly Skilled Migrant Programme Forum, has called the cap “illogical.”

He said: “We don’t think that any sort of cap would work out. It would be unworkable. The effects remain to be seen, but if the government really tries to implement drastic measures it is going to cause a lot of unhappiness, especially among migrants who work hard and pay taxes.”

Indian professionals to oppose UK immigration cap - All India Today

Meanwhile, corporate law firm Dundas & Wilson has said that the immigration cuts will challenge firms as they attempt to plan resources. A spokesperson for the firm said:

“The imposition of the temporary cap and the forthcoming permanent cap make it much more difficult for employers to keep up with the changes and to plan their resourcing. Some employers may have their recruitment plans impacted by this new cap possibly leaving them with skills shortages in certain areas.

“The Information and Communications sector as a whole in the UK employs around 9000 sponsored migrant workers.”

Offsetting this, however, is the need for value for money in the IT departments of the UK’s businesses and organisations. Outsourcing is not simply cheap foreign labour; it is sourcing the right skills for the job, which, with the UK’s technology skills deficit, is a godsend to many UK firms. Added to this, IT departments have been under pressure to stretch budgets even further thanks to the recession, and now, along comes a VAT rise. From January 2011, VAT will rise to 20%. This, of course, places further pressure on IT departments to reduce spending. Richard Brown, IT risk and assurance partner at Ernst & Young, told ComputerWeekly.co.uk:

“Many CIOs have had to operate with reducing or flat budgets during the downturn. During that period the need to invest in IT has not gone away and in many instances has become more mission critical.

“There is now a growing backlog of spend across many parts of the IT estate, such as hardware (server/laptop) refresh, implementing and licensing new and existing technologies, hiring contractors for skills gaps and new technical skills and purchasing third party service provision, which will need to be incurred. The VAT rise has just made that a little more expensive.”

This need to squeeze every last drop of value out of budgets may drive more firms to outsource services abroad, making competition for those migrant workers more intense. On MoneyHighStreet.com, Chris Ray discusses just this. He explains that, particularly for firms such as financial service providers who can’t claim back 100% of their VAT, costs such as those of hiring and maintaining staff will increase. This, Ray concludes, could lead to many financial service providers reviewing their expenditure and lead to “more outsourcing abroad.”

It is, in fact, outsourcing companies, not UK companies, that will feel the pinch of the VAT hike when it comes to offshoring. Earlier this year, the EU changed the rules on VAT paid by companies outside of the union, who suddenly had to pay 17.5% when they were used to 0%. Now, as Silicon.com’s Mark Kobayashi-Hillary predicted last month, those outsourcing companies will have to swallow the 2.5% VAT increase as well, absorbing it into their costs and reducing their profit markets in order to cash in on the very likely increase of interest in outsourcing.