Salary sacrifice retail vouchers are now subject to VAT
The ECJ has yesterday ruled that AstraZeneca (AZ) must account for VAT on the cash received (the salary sacrificed) to its employees under their salary sacrifice for retail vouchers arrangement. The ECJ has essentially followed the arguments of HMRC that AZ is making a supply of services (of the vouchers). However, AZ is entitled to reclaim the VAT incurred on the purchase of the vouchers.
This has worrying implications for any business that currently operates a salary sacrifice scheme of any kind. Any scheme that allows the provision of retail vouchers to employees is likely to be subject to some investigation from HMRC following this decision, and a potential assessment for VAT due for the previous four years.
Arguably, there should be some protection for businesses given HMRC's previously accepted practice of regarding sacrificed salary as not consideration for a supply, and hence ignored for VAT purposes. The ramifications of this case for other items for which salary can be sacrificed, for example, cars and the 'Cycle to Work' scheme will no doubt have to be reviewed by HMRC and appropriate guidance issued. Businesses should urgently consider the impact of this case on any current or future remuneration planning and seek further advice accordingly. It may be possible to re-structure remuneration planning to move away from salary sacrifice arrangements that would now appear to attract a VAT cost.
In the light of this ruling, employers may wish to review the choices available under their flexible benefits scheme and the basis on which they price the various options. Employers looking to make changes to their schemes need to consider the employment tax and national insurance implications of changing the terms of the salary sacrifice arrangements during the normal 12 month life of the scheme. Employers should not pass VAT on to employees without taking advice.
AstraZeneca (AZ) allowed its employees to exchange part of their remuneration for retail vouchers under a 'traditional' salary sacrifice arrangement. AZ purchased the retail vouchers at a discount to their face value, incurred VAT on their purchase, and then allowed employees to sacrifice a proportion of their salary to obtain the retail vouchers. The employees sacrificed salary to the extent of the discounted price that had been paid for the vouchers by AZ. Initially, AZ did not claim the VAT incurred on the purchase of the vouchers, nor did it account for output VAT on their provision to the AZ's employees. Following advice, AZ sought to reclaim the VAT incurred on the vouchers on the basis that they were a business overhead cost. HMRC took the view that AZ was either not entitled to reclaim this input VAT, or if it was entitled to reclaim this VAT, it must thereafter account for output VAT on the value of the vouchers provided to the employees, i.e. on a sum equal to the salary sacrificed by the employees to obtain the vouchers.
For further information contact:
Hannah Dobson, Director (VAT)
T: 020 7131 8138
Email Hannah Dobson
Or
Inez Anderson, Director (Employment tax and incentives)
T: 020 7131 4919
Email Inez Anderson
PR enquiries
Jess Koslow/ Matthew Rowe 020 7131 4264/4550
Disclaimer
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
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