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Salary sacrifices stumped by new VAT rules

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11th Aug 2011
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Changes to the VAT treatment of salary sacrifice schemes could increase their cost and make them more complicated to run, reports Nick Huber.

From January 1 2012, companies will have to pay VAT on non-cash goods and services provided to employees in exchange for some of their salary, HMRC has announced.

Employers will still be able to reclaim tax paid to suppliers for the goods and services as input tax.

The change to the VAT treatment of salary sacrifice schemes, which often include such as bikes, childcare vouchers, and high street shopping vouchers, follows a ruling last year by the European Court of Justice (CJEU) over a tax dispute between AstraZeneca UK and HMRC (Case C-40/09).

The case involved retail vouchers provided to employees as part of a remuneration package.

Astra bought retail vouchers at less than their face value and passed them on to employees at that discount -- the cost of which was then deducted from their employees’ pre-tax salary.

The dispute with HMRC was triggered after Astra argued that it did not have to charge VAT on the supply of vouchers to the employees.

The ECJ agreed with HMRC, ruling that the salary sacrificed was a supply of services in return for a payment and was therefore subject to VAT. Before the court ruling it was generally assumed that salary sacrifice schemes would not be subject to VAT.

In new guidance on VAT rules for salary sacrifice schemes HMRC says that the ECJ Astra ruling has wider implications for the VAT treatment of salary sacrifice schemes.

“It is clear that the principles applied by the CJEU are not confined to vouchers, but are equally applicable to many other situations where employers offer benefits to their staff,” HMRC says. “Where the benefit is subject to VAT, output tax will be due from, and input VAT recoverable by the employer in accordance with the normal rules.”

To allow businesses time to make the necessary adjustments, HMRC will not require output tax to be accounted for on taxable benefits provided under salary sacrifice schemes, until 1 January 2012, it said.

Nigel Harris, partner, corporate and client services at accounting firm Burton Sweet, said that HMRC's reaction to the Astra Zeneca decision will have have an “unfortunate knock on effect” on a range of employment payments and benefits, including cycle-to-work schemes and childcare vouchers.

The new rules will introduce some “unwelcome complications”, Harris said. “Companies offering childcare vouchers under salary sacrifice arrangements will have to apply partial exemption rules to the input tax on administrative fees charged by voucher providers, which could be a huge and disproportionate burden for very large employers.”

VAT remains due when a bicycle is disposed of and its value should normally be based on the price of an identical or similar item, taking into account the age and condition, HMRC says in its guidance.

Replies (7)

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By Steve Knowles
15th Aug 2011 11:53

VAT and Childcare Vouchers

This doesn't fit with the family friendly policies we are all required to embrace

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By hairyfingers
15th Aug 2011 13:17

Childcare voucher unaffected - apparently

according to the HMRC link in the article to the new guidance para 4.3 states childcare vouchers are unaffected.  So they will remain a VAT exempt supply from voucher supplier, therefore remain a VAT exempt supply to the employee. So it's still a worthwhile benefit - for the moment!

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Replying to Vaughan Blake1:
Nigel Harris
By Nigel Harris
15th Aug 2011 20:50

The childcare vouchers trap

The supply of childcare vouchers will be an exempt supply to the employees. Sounds OK if you are an exempt business like a bank or insurance company. But what if you are currently fully VATable? From next year the supply of childcare vouchers to your employees makes you partially exempt for VAT purposes! Firstly, you will no longer be able to reclaim the VAT on the voucher supplier's charges, probably not a significant amount, but if you have a large workforce receiving such vouchers it could affect your overall ability to recover VAT on the rest of your business! Not likely to affect your or my clients but some big multi-nationals might have to do some careful sums!

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By Alastair Johnston
23rd Aug 2011 11:40

What I don't get about this ...

... is how it ever got as far as the Tribunal. 

If HMRC historically allowed input VAT recovery on the costs of the scheme, and treated the provision of the vouchers to the employee as not being a supply (or being a supply outside the scope), why did they resist Astrazeneca's claim in the first place? 

Had they already announced a change of policy, and this was the test case?  None of the commentary I have seen says so but maybe I have missed something. 

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By Alastair Johnston
23rd Aug 2011 11:53

Retail vouchers, anyone?

I'm surprised the company offered retail vouchers through its salary sacrifice scheme anyway.  They were always subject to income tax, and when the NIC saving was removed (over 10 years ago?), the only remaining advantage was the discount offered by the retailer.  Surely a VAT charge must be the death of retail voucher schemes, as no retailer will offer a discount equal to the VAT charge. 

I had the chance to take some several years ago, but just after my employer announced the scheme, the NIC saving was done away with.  I reckoned that the benefit was then outweighed by the inflexibility of having to take a fixed amount of vouchers every month and the hassle.  There were some hoops to jump through, though I can't remember what they were now.  Even if you knew you would be able to spend significant sums every month, e.g. supermarket vouchers, it just wasn't worth it. 

 

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Pay Academy Director
By nikicaister
09th Sep 2011 11:10

Cycle to work schemes

Ok, so I think I see where we are going with childcare vouchers - not an issue for the employee but potential implications for the employer in terms of VAT recovery on the admin fees with wider implications for VAT status in some extreme cases. But, having read the HMRC guidance I am still confused about the cycle scheme effect.  We have loads of clients operating these schemes...So, employer now has to account for the VAT on the value of the salary sacrificed - 1st question - grossed up or inclusive? In other words, if the monhtly sacrifice is £40 is the accountable output VAT £6.67 or £8.00?

Secondly - if the amount is gross up, is this simply suffered by the employer - i.e. not levied against the employee? Clearly, if it is already treated as gross there is no effect for the employee; just an additional cost to the employer...either way the employer loses out and to a greater extent than any NIC saving that the plan originally delivered to the employer. So that will be the end of that then - won't it?

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By Jasper21
25th Sep 2011 22:26

green commuter policy???

Given the increase in cost of the cycle to work scheme from Jan 2012, what is the most tax efficient way of offering to all employees the opportunity to use a bicycle provided by a Vat registered Ltd Co as a "qualifying" non taxable benefit to the employee?

Is it still via the Cycle to work scheme? or should the company purchase the bicycles and provide use without salary sacrifice?

I am looking to establish such a policy and am now confused as to the best way forward 

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