Most employers offer their employees the option of sacrificing some of their salary entitlement in exchange for various employer-provided benefits. Following a recent tax case, there could now be a VAT complication.
The popularity of salary sacrifice is not surprising given the tax and national insurance contributions (NICs) savings that can be made. For example, salary might be sacrificed in return for childcare vouchers – saving both income tax and NICs. The range of benefits being offered is widening, and now includes pension contributions, staff meals, cycle-to-work schemes and bus travel.
HM Revenue & Customs (HMRC) previously accepted that the salary reduction was not consideration for the benefits received, and therefore output VAT was not due. However, following a decision by the European Court of Justice (ECJ), this treatment will change. The decision concerned AstraZeneca, whose employees sacrificed salary in exchange for shopping vouchers on which the company recovered input VAT. The ECJ decided that the salary sacrificed represented a supply, and that output VAT was therefore due.
Although the decision dates from 2010, HMRC will only be applying the change from the later of 1 January 2012 or, if the salary sacrifice was agreed before 28 July 2011, the date from when the current agreement ends – usually the date of the employee’s annual salary/benefits review. From that date, where a benefit is liable to VAT then input VAT will be recoverable, but output VAT will be due on the higher of the amount of salary sacrificed and the value of the benefit. The change will affect cycle-to-work schemes, shopping vouchers, food and catering provided by employers (unless zero-rated), but not childcare vouchers because they are not subject to VAT.
The ECJ decision only applies where consideration is received in exchange for benefits, so it does not affect the treatment of benefits provided free to all employees, such as workplace gyms. The decision also does not alter the tax and NICs treatment of salary sacrifice schemes.
The big question for employers is who will bear the additional cost where output VAT is now going to be due – the employer or the employee? If the employer is not prepared to bear the cost, then schemes will need to be amended accordingly.
VAT is never easy, so please contact us if you need further advice.
