Employers will need to account for VAT on the salary foregone by employees in return for vouchers or goods and services – including bicycles provided under the Cycle to Work Scheme – from January 2012.
The principles applied in a decision of the European Court of Justice to the supply of high street shopping vouchers to employees will be applied to other supplies of goods and services to employees, HMRC announced.
Childcare vouchers will not be directly affected, HMRC said, but employers paying administration fees to a voucher provider will need to consider the partial exemption rules.
‘Whilst HMRC accepts that no VAT should be due on VAT exempt benefits, any input VAT incurred in connection with the provision of VAT exempt benefits is likely to become irrecoverable,’ Deloitte said. But the firm claimed that HMRC’s announcement ‘raises as many questions as it answers’.
The Cycle to Work Alliance said the HMRC announcement was a ‘helpful clarification on the tax implications of the scheme for participating companies’. Scheme participants can now ‘plan with certainty’, it said.
The ECJ held in Astra Zeneca UK Limited v HMRC (Case C-40/09) that giving vouchers to employees under a salary sacrifice scheme was a supply made for a consideration – the remuneration given up by the employees – and that VAT should be accounted for.
Astra Zeneca had bought the vouchers from an intermediary and recovered the VAT charged on that purchase, but had not accounted for any VAT on the supply of the vouchers to its employees.
'Salary sacrifice' has a very narrow and specific meaning for VAT purposes, HMRC said in Revenue & Customs Brief 28/11, published last week.
‘In relation to such schemes HMRC have, to date, accepted that the reduction in the salary did not constitute consideration for the benefits received and output tax was not due.’
As a result of the ECJ decision, HMRC added, there is no longer a distinction between deductions from salary (already treated as consideration for a supply) and a salary sacrifice.
‘Therefore, the amount of salary foregone is consideration for supplies of the benefits whether provided under a salary sacrifice or by a deduction from salary. It is clear that the principles applied by the [ECJ] are not confined to vouchers, but are equally applicable to many other situations where employers offer benefits to their staff.’
Employment tax specialists at Pinsent Masons observed that the ECJ decision was a blow to many employers. ‘There appears to be no reason why the same logic could not be applied to other salary sacrifice arrangements,’ Janet Hoskin and Chris Thomas wrote in Tax Journal (20 December 2010).
‘It could be argued that the provision of almost any benefit (not just vouchers) under a salary sacrifice scheme is a supply for which the employee has "paid" by giving up some remuneration, meaning other types of salary sacrifice (eg green cars) could also give rise to VAT liabilities and potential assessments by HMRC.’
Employers will need to account for VAT on the salary foregone by employees in return for vouchers or goods and services – including bicycles provided under the Cycle to Work Scheme – from January 2012.
The principles applied in a decision of the European Court of Justice to the supply of high street shopping vouchers to employees will be applied to other supplies of goods and services to employees, HMRC announced.
Childcare vouchers will not be directly affected, HMRC said, but employers paying administration fees to a voucher provider will need to consider the partial exemption rules.
‘Whilst HMRC accepts that no VAT should be due on VAT exempt benefits, any input VAT incurred in connection with the provision of VAT exempt benefits is likely to become irrecoverable,’ Deloitte said. But the firm claimed that HMRC’s announcement ‘raises as many questions as it answers’.
The Cycle to Work Alliance said the HMRC announcement was a ‘helpful clarification on the tax implications of the scheme for participating companies’. Scheme participants can now ‘plan with certainty’, it said.
The ECJ held in Astra Zeneca UK Limited v HMRC (Case C-40/09) that giving vouchers to employees under a salary sacrifice scheme was a supply made for a consideration – the remuneration given up by the employees – and that VAT should be accounted for.
Astra Zeneca had bought the vouchers from an intermediary and recovered the VAT charged on that purchase, but had not accounted for any VAT on the supply of the vouchers to its employees.
'Salary sacrifice' has a very narrow and specific meaning for VAT purposes, HMRC said in Revenue & Customs Brief 28/11, published last week.
‘In relation to such schemes HMRC have, to date, accepted that the reduction in the salary did not constitute consideration for the benefits received and output tax was not due.’
As a result of the ECJ decision, HMRC added, there is no longer a distinction between deductions from salary (already treated as consideration for a supply) and a salary sacrifice.
‘Therefore, the amount of salary foregone is consideration for supplies of the benefits whether provided under a salary sacrifice or by a deduction from salary. It is clear that the principles applied by the [ECJ] are not confined to vouchers, but are equally applicable to many other situations where employers offer benefits to their staff.’
Employment tax specialists at Pinsent Masons observed that the ECJ decision was a blow to many employers. ‘There appears to be no reason why the same logic could not be applied to other salary sacrifice arrangements,’ Janet Hoskin and Chris Thomas wrote in Tax Journal (20 December 2010).
‘It could be argued that the provision of almost any benefit (not just vouchers) under a salary sacrifice scheme is a supply for which the employee has "paid" by giving up some remuneration, meaning other types of salary sacrifice (eg green cars) could also give rise to VAT liabilities and potential assessments by HMRC.’
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