August 18, 2010

The VAT benefit of many salary sacrifice arrangements will soon be lost!


‘Salary sacrifice’ arrangements are an effective way of employers and employees reducing tax and National Insurance (NI) costs because the amount of salary sacrificed is subtracted from pre taxed income. Under the schemes, the employee agrees to forgo a proportion of their salary for a non-cash benefit. This benefit could be a contribution to pension, help with childcare or used to cover the cost of anything from a bike to a car, or a bus pass to retail vouchers.

In addition to the tax and NI benefits, HM Revenue & Customs (HMRC) position has been that, if structured correctly, many salary sacrifice arrangements also have a VAT benefit. However, this is now likely to change, following last week’s European Court of Justice (ECJ) judgment in the AstraZeneca (AZ) case.

Astra Zeneca Case

AZ provided retail vouchers to its employees as part of their remuneration package. It recovered VAT on the purchase of the vouchers but did not account for VAT on the provision to the employees. The ECJ has ruled that VAT should be paid to HMRC by AZ on vouchers given to its employees. The salary sacrificed by employees is payment for the vouchers. This will have significant implications for a number of businesses.

The Wider Implications

The ECJ has essentially followed the arguments of HMRC and ruled that AZ is making a supply of services (of the vouchers) to its employees and it must account for VAT on the cash received (the salary sacrificed) for those vouchers. However, AZ is entitled to reclaim the VAT incurred on the purchase of the vouchers.

This has worrying implications for any business that currently operates a salary sacrifice scheme of any kind. Any scheme that allows the provision of retail vouchers to employees is likely to be subject to investigation from HMRC following this decision, and a potential assessment for VAT due for the previous four years. Arguably, there should be some protection for businesses given HMRC’s previously accepted practice of regarding sacrificed salary as not consideration for a supply, and hence ignored for VAT purposes, but this cannot be guaranteed.

The ramifications of this case for other items for which salary can be sacrificed, for example, cars and the ‘Cycle to Work’ scheme will undoubtedly also be reviewed by HMRC and guidance issued.

Depending on how HMRC apply this judgment, this could result in many employers who have introduced similar voucher and salary sacrifice arrangements being hit with a substantial additional VAT liability. It will also cause confusion as the salary sacrificed is not treated as a payment for direct tax and NI purposes. The decision could costUKemployers around £0.5 billion over the past four years in unpaid VAT; and over £100 million per year going forward.

As always, should you wish to discuss this matter, please do not hesitate to contact us.

Elysian Associates
August 2010

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