The future of salary sacrifice schemes

David Buckle outlines what the AstraZeneca decision means for salary sacrifice schemes going forward.

A recent European Court of Justice (ECJ) decision attacked the efficiency of salary sacrifice schemes. In AstraZeneca UK Limited v HMRC (Case C-40/09) the court considered the VAT treatment of retail vouchers provided by an employer to its employees as part of its salary sacrifice arrangements.

Under the arrangement Astra Zeneca acquired retail vouchers at less than their face value. They passed them on to employees at that discount, the cost of which was then deducted from their employees’ pre-tax salary. This meant that employees would receive a voucher with a face value much higher than the cost to them.

When Astra Zeneca bought the vouchers they paid VAT to the supplier. Astra Zeneca then sought to reclaim the VAT charged by the supplier on the vouchers as part of its deductible input tax. The dispute in this case arose after Astra Zeneca then argued that it did not have to charge VAT on the supply of vouchers to the employees.

HMRC argued that either the VAT charged to Astra Zeneca was not recoverable as input tax, or, if it was recoverable, Astra Zeneca should charge VAT on the supply to the employees. The ECJ agreed with HMRC, holding that Astra Zeneca had to account for VAT on the supply of the vouchers to the employee, and the amount of the salary sacrifice was the amount paid by the employees for the vouchers inclusive of VAT. Whilst this meant that Astra Zeneca could recover the supplier’s VAT as input VAT, it also meant the company had to account for VAT on the salary sacrifice arrangements, creating a loss under the benefits supplied in respect of the salary sacrifice (i.e. the cost of the vouchers was more than the salary sacrifice less an element for VAT). HMRC has not yet said whether it will attempt to recover the VAT underpaid over the last four years under this scheme (and others like it) or will simply require a change going forward. What is clear is that HMRC will change its approach in relation to this type of salary sacrifice schemes.

The upshot of this case is that this is likely to make salary sacrifice schemes less attractive in future. Whilst it is unlikely to affect the more common salary sacrifice schemes, for example, where salary is reduced to allow for greater pension contributions, this will have a major impact on employers who provide, say, the cycle to work scheme to pass on benefits to employees in a tax efficient way.

Some of these voucher schemes may be unaffected. In some cases face value vouchers are not subject to VAT on issue or supply, for example, is where vouchers are given by an employer to be redeemed against its own goods. Also certain forms of benefit in respect of the salary sacrifice are exempt or outside the scope of VAT, such as pension contributions mentioned above and childcare vouchers. This means some of these schemes can be continued and their efficiency is unaffected.

Where there is no exemption for VAT, if an employer wishes to provide benefits such as retail vouchers without charging VAT and to ensure this case does not damage the efficiency of these schemes, employers must ensure that there is no link between the reduction in salary and the provision of the voucher. This will be problematic in practice as this will mean employees will have to agree to a lower salary without a direct contingent benefit. In any event, going forward, changing schemes that are affected by this case needs to be done with caution. Simply changing or removing now inefficient schemes to avoid them becoming subject to this new ruling could be a breach of an employee’s contract unless a legal approach to amending contractual terms is taken.

David Buckle is a consultant employment solicitor at Cubism Law.