Salary sacrifice and canteen arrangementsMonday, November 29th, 2010
Section 317 of the Income Tax (Earnings and Pensions) Act 2003 provides a tax exemption for the provision of free or subsidised meals provided for employees in a canteen or on the employer’s business premises. By means of provisions in the Finance Act 2010, a further condition has been added so that, from April 2011, the exemption will not apply if it is used in conjunction with salary sacrifice schemes or flexible benefits schemes.
This change was announced at the time of the 2009 Pre-Budget Report in response to schemes that, in effect, allow some employees to purchase canteen meals out of gross pay and hence obtain a significant tax and NICs advantage over the majority of employees who purchase meals using their net pay.
HMRC has now published a document that attempts, in rather complex terms, to distinguish between the operation of the new condition that prevents the use of salary sacrifice arrangements in connection with free and subsidised meals and the specific schemes that prompted the change which, in HMRC’s view, do not meet the existing conditions because, in operation, they provide employees with money rather than meals.
Such schemes, for example, involve the use of an electronic cash card or account which is “topped up” by the employer and used by employees to obtain meals in the canteen. Over the past year, HMRC has been challenging some existing canteen salary sacrifice schemes on the grounds that the section 317 exemption does not apply to such schemes. Rather, because money is being provided, albeit intangibly, it is taxable in full as earnings. HMRC’s reasoning is set out in the Employment Income Manual (EIM), on page 21675. (See link below)
HMRC’s new document, therefore, is aimed at employers operating such schemes, warning them that the introduction of the new exemption condition in April 2011 does not make HMRC’s challenges go away. HMRC will continue to seek to recover tax from employers who have operated, or continue to operate, schemes that, in its view, do not meet the terms of the exemption in the first place.
Page 21675 of EIM points out that some such card or account-based schemes do meet the conditions for exemption. HMRC considers that a card or account scheme is effective if it operates only to provide access to employer-provided meal discounts on a particular day and the value that is available to the employee for that meal is lost if it is not used.
Addressing the argument that it is unfair for HMRC to pursue employers for non-compliance retrospectively when a year’s notice was given about the additional condition for tax exemption, HMRC points out that the change:
“is intended to give employers with effective existing arrangements reasonable time to consult their employees, consider their options and make changes to their arrangements, if they so choose. The legislation’s commencement date is not a period of grace for all employers with existing arrangements. Employers will continue to be subject to technical challenge on the basis of the current legislation where HMRC considers that arrangements are not effective. “