VAT and salary sacrifice schemesFriday, August 5th, 2011
HMRC provides guidance on the VAT implications of the CJEU decision in the Astra Zeneca flexible benefits case.
“input tax” is the amount of VAT paid when goods or services are purchased.
“output tax” is the amount of VAT charged when goods are sold or services provided.]
In a decision given on 29 July 2010 in the case Astra Zeneca (UK) Taxation, the Court of Justice of the European Union (CJEU) ruled that
“the provision of a retail voucher by a company, which acquired that voucher at a price including value added tax, to its employees in exchange for their giving up part of their cash remuneration constitutes a supply of services effected for consideration within the meaning of that provision.”
In simple terms, this means that, if an employee gives up some pay in return for a retail voucher, the amount of pay given up is treated as payment for the purchase (or “consideration for the supply”) of the voucher. Therefore, if the employer paid VAT on top of the voucher price (i.e. input tax), the amount paid by the employee must also include VAT, requiring the employer to account for “output tax” on the sale of the voucher to the employee.
The implications of this decision are outlined in a recently published VAT Revenue & Customs Brief.
Astra Zeneca provided retail shopping vouchers to employees as an option in its flexible benefits scheme in return for a reduction in salary. However, the principles considered by the CJEU are of general application and apply equally to the provision of other goods and services to employees.
HMRC’s position has always been that, if an employee pays for a benefit from salary or wages, the employer can recover the input tax paid in order to provide the goods or services, and output tax is due on the amount deducted from salary. To that extent, the CJEU decision simply confirms existing HMRC VAT rules.
However, HMRC has, in the past, drawn a distinction between (1) goods and services paid for from salary, and (2) benefits provided in conjunction with a salary sacrifice scheme. On the basis that the contractual reduction from salary is not payment for the benefit (a fundamental principle of salary sacrifice arrangements), HMRC has taken the view that the salary reduction is not a consideration for the supply of the benefit. As a result, employers could recover the input tax incurred in providing the benefit but output tax was not due.
In the context of Astra Zeneca’s flexible benefits scheme, where the retail vouchers were provided under a salary sacrifice arrangement, the CJEU found that there was a direct link between the provision of the vouchers and the cash remuneration given up by the employees. As a result, HMRC’s view now is that there is no longer a distinction for VAT purposes between deductions from salary to obtain benefits and reductions in salary to obtain benefits by means of a salary sacrifice. Therefore, the provision of the benefit is a “consideration for supply”, whether provided under a salary sacrifice or by a deduction from salary. As a result, if the benefit is subject to VAT (i.e. not exempt or zero-rated), output tax is due.
As the application of the CJEU decision is not limited to vouchers, the implications extend to other benefits that are provided under salary sacrifice schemes.
To allow businesses to make the necessary adjustments to their accounting procedures, HMRC does not require output tax to be accounted for on taxable benefits provided under salary sacrifice schemes until 1 January 2012.
In most cases, the value of a benefit for VAT purposes will be the same as the amount of salary deducted or sacrificed. Where this is less than the true value (e.g. where employers supply the benefit at below cost), the value should be based on the cost to the employer.
The CJEU decision was made only in the context of VAT and has no “read across” to tax due on employment income. There is, therefore, no change to the income tax rules applicable to salary sacrifice schemes.
The VAT implications for the provision of certain benefits, specifically cycles and cycling equipment, retail vouchers, childcare vouchers, subsidised meals, benefits provided without any salary deduction or reduction, and cars, are discussed separately in the Revenue & Customs Brief, and should be consulted by employers as appropriate. Where changes to accounting procedures are required, they must be made from 1 January 2012.