Independent VAT Consultant
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Salary sacrifice payment was not subject to VAT

27th Jul 2018
Independent VAT Consultant
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Travel and subsistence

Neil Warren considers the case of Pertemps Ltd and wonders why HMRC took so long to think about the VAT issues of salary sacrifice arrangements.

The aim of the mobile advantage plan (MAP) operated by Pertemps Ltd (TC06583), was to replace some salary from employees each week with payment for travel expenses, plus an extra deduction of 50p or £1 as a payment towards Pertemps’ costs of operating MAP.

The amount of salary sacrificed in this way was based on the travel and subsistence expenditure incurred by flexible employees on temporary assignments during that particular week.


Neil is employed by recruitment agency PT Ltd on a three-month contract to review VAT systems for a client in Birmingham. He travels from Manchester to Birmingham by train each day at a weekly cost of £100 and also pays £25 each week for his lunch. His gross weekly pay is £800.

At the end of the week, Neil will sacrifice £126 of his salary (ie rail fare £100 + lunch £25 + £1 admin fee) but will receive payment of his expenses by making a separate claim to PT Ltd for the cost of travel and lunch: ie an amount of £125.

The benefits of this arrangement are that Neil will pay tax and NI based on £674: = £800 - £126, and PT Ltd will also pay employers NI on this reduced amount of salary. Everyone wins, apart from HMRC.

Without diverting too much time into the mysterious world of direct tax, this arrangement was only available to employees working on contracts of two years or less, because a longer period meant the travel would be classed as “home to office” and subject to tax anyway.

VAT issues

HMRC did not seem concerned about the VAT issues of the MAP (which started in 2004), until an assessment for £529,754 was issued in December 2013 covering periods back to July 2009 (the four-year assessment cap).

And a further assessment for £186,344 was issued one year later, both assessments raised on the basis that the salary deductions made by Pertemps related to a taxable supply of operating the MAP scheme. The taxpayer’s view was that there was no supply of services from Pertemps to the employees, the employees were just accepting lower wages in return for the payment of tax free expenses for travel and subsistence.

Court decision

The tribunal agreed with the taxpayer that the salary deduction did not relate to a supply of goods or services by Pertemps to its employees. It also decided that the MAP did not relate to an ‘economic activity’ (the phrase in EU law for ‘business’). To quote from the tribunal report: “The employee is not paying for the operation of the scheme…he is seeking to obtain the tax-free payment of expenses.”

As a further decision, the court also said that even if the salary sacrificed was a supply, it would be exempt from VAT as relevant to dealing in money (Item 1, Group 5, Sch 9, VATA 1994).


I certainly feel sympathy for the taxpayer that MAP scheme had been operating for about nine years before any HMRC officers put on their VAT hats and tried to get a share of the cake. A salary sacrifice scheme was first introduced by the taxpayer in 2004 with HMRC agreeing to the method in a written letter in July 2004.

HMRC’s defence would probably be that July 2004 was nine months before the merger of Customs and Excise and the Inland Revenue when different methods were adopted.

We now live in an age of joined up thinking where all taxes are considered at the same time, and perhaps by the same HMRC officers.

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By Echo761
30th Jul 2018 10:18

"We now live in an age of joined up thinking where all taxes are considered at the same time, and perhaps by the same HMRC officers."
Agreed Neil, involved in a case at the moment where an HMRC Direct tax inspector (who signs letters as H.M. Inspector of Taxes...) is effectively carrying out a VAT visit, well I say visit - all carried out by correspondence. But they approach it from a very different style - by suggesting their argument (and quoting incorrect parts of the EU VAT Directive) then looking for comment... then considering comments, then proposing more of theirs and so it goes on... All the while VAT periods are falling out of time and they do not realise it. You have to laugh!!

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