The VAT tribunal has ruled that Northumbria Healthcare NHS Foundation Trust (UKUT0170) can recover all of the VAT it paid on the cost of leasing cars to employees under a salary sacrifice scheme.
When an employee of the Northumbria Healthcare NHS Foundation Trust opts into the salary sacrifice scheme he or she takes a salary reduction in return for the provision of a leased car.
For example, an employee might prefer an annual salary of £30,000 plus a leased car, rather than a salary of £35,000 without the car. In such cases, the £5,000 salary reduction is not subject to output tax under Reg 2 of the VAT (Treatment of Transactions) Order 1992 (SI 1992/630), which is effectively a de-supply order.
NHS Trusts are able to claim VAT paid on many non-business costs under VATA 1994, s 41(3). The taxpayer argued that the effect of Reg 2 of SI 1992/630 was that the leasing activity was deemed to be a non-business arrangement and therefore the leasing costs qualified for 100% VAT recovery.
HMRC argued that the leasing activity was still ‘business’ and therefore the Trust could only claim 50% of the VAT paid.
The 50% VAT recovery limit is the input tax recovery rate for a business that leases a motor car that has some business and private use (see VAT Notice 700/64, para 4.2).
The upper tier tax tribunal (UT) supported the taxpayer and allowed the appeal. The fact that the NHS recovery rate of 100% would be different to the 50% rate claimed by a commercial business was not considered to be relevant.
The judges commented that the solution to this situation was to amend the law rather than seek to reinterpret the law to achieve the same outcome for private and public sector bodies.
As a completely separate issue, don’t forget that deductions from salary are subject to output tax if the deduction relates to a VATable supply.
I recently had a query from an accountant about whether £30 a month deducted from employees’ salaries to contribute towards the costs of a corporate gym membership could be exempt from VAT as it benefits the health of the individuals in question.
Many health services are exempt from VAT eg services of registered health professionals such as opticians and dentists. What an excellent suggestion, I thought, but unfortunately the answer is ‘no’ and output tax is due on the deductions because they relate to the VATable benefit of using a gym.
Why was the first tier tribunal bypassed?
You may wonder why this appeal went straight to the UT and bypassed the first tier tribunal (FTT): I certainly did.
The reason is because the NHS Foundation Trust asked for a judicial review of HMRC’s refusal to refund VAT, and claims made by government departments are not appealable decisions to the FTT under VATA 1994 s 83.
You learn something every day in the world of the nation’s favourite tax.
About Neil Warren
Neil Warren is an independent VAT consultant and author who worked for Customs and Excise for 14 years until 1997.