The provision of salary sacrifice schemes was probably not anticipated in 1973 when VAT was first introduced in the UK – and this is evident from the number of cases concerning the treatment of employee contributions which have been considered over the years. Nevertheless, and irrespective of what has gone before, the decision in the Astra Zeneca case last year has helped to provide clarity, and HMRC subsequently issued two Business Briefs (28/11 and 36/11) on the issues.
Prior to the Astra Zeneca case decision, HMRC policy was to make a distinction between the VAT treatment of supplies of goods and services to employees by deduction from salary (VAT claimed on the cost, and VAT payable on the amount deducted), and those provided under a salary sacrifice arrangement (VAT claimed on the cost but no VAT payable on the amount of salary sacrificed) – albeit that both resulted in the employee ending up with less ‘cash’ at the month end.
The Astra Zeneca Decision
The essence of the European Court decision is that there is no longer a distinction between deductions from salary and salary sacrifice. This being the case, HMRC have taken the view that whilst it is appropriate for a business to claim the VAT element of such costs, the business must also account for and pay VAT (where appropriate) in respect of the amount of salary either deducted or sacrificed, thus providing a common approach for both.
With effect from 1 January 2012, the amount on which VAT is due, under salary deduction or sacrifice schemes, is the amount deducted from the employee. However, where the amount charged or deducted is less than the cost to the employer, VAT will be due on that cost value.
These changes do not, however, apply where the salary sacrifice arrangements were already in place on or before 27 July 2011 (the date of the Astra Zeneca decision) or a fixed term arrangement expires. In such cases VAT will continue not to be due until the arrangements are reviewed or the term expires.
Employers should, nevertheless, take care to not charge and / or account for VAT on supplies which are exempt from VAT, for example: -
- nursery vouchers
- pension contributions, and
- supplies on which VAT has not been claimed by the business
VAT will also not be due where no charge, deduction or sacrifice is made, such as free or subsidised meals, as long as they are made available to all employees.
Businesses should now be reviewing their current arrangements and where necessary bring them in line with the new changes.
The outcome of the Astra Zeneca case should probably not come as any great surprise, and in a number of ways simplifies the VAT treatment, by treating similar things in the same way – and appears to provide a further level of fiscal neutrality. Albeit that the result is a further amount of VAT payable by the business (as charged to the employee) this approach does follow the basic principles of VAT, in applying VAT to supplies of goods and services when supplied by a VAT registered business. It doesn’t, however, mean that the new approach is going to be popular!
If you would like further assistance with this or any other VAT matter, email Karen Mulcahy or contact on 01962 735350.
HMRC have issued their opinion regarding the impact of the Court of Justice of the European Union (CJEU) decision on the UK VAT treatment of certain supplies made by employers under salary sacrifice schemes. The case specifically concerned the correct VAT treatment of high street shopping vouchers provided to employees by Astra Zeneca as an option under a salary sacrifice scheme. The implications of the case were deemed to have a wider impact, and this has now been confirmed and clarified by HMRC in Revenue & Customs Brief 28/11.
The CJEU decided that the provisions of the vouchers was a taxable supply of services to the employee for a consideration (i.e. the amount of salary sacrificed), so on this basis output VAT should be accounted for on the supply where applicable. Up to that point recovery on purchase had been based on the assumption this was an overhead cost of the business and was therefore subject to normal partial exemptions rules.
The key point to note now is that the provision of services/goods under salary sacrifice schemes are subject to VAT where applicable but items such as nursery vouchers will be an exempt supply.
Input VAT recovery will now depend on the liability of the supply on of the items in question. For partially exempt businesses already above the de-minimis levels, it may mean that input VAT recovery is permanently blocked on costs directly attributable to the purchase of items such as nursery vouchers. The cost to businesses will become the VAT on the supply to the employee or irrecoverable input VAT on non-taxable items.
The good news is that the changes on input VAT recovery and output tax charges will not come into effect until 1 Jan 2012 so businesses have some time to review their salary sacrifice arrangements not only from a direct tax perspective but also VAT.