The European Court of Justice ("ECJ") held in Astra Zeneca UK Limited -v- HMRC that most benefits provided to employees under salary sacrifice schemes are subject to VAT, which will make such schemes considerably less attractive.
Salary sacrifice schemes are hugely popular: the 'cycle to work' scheme being a good example, allowing employees to purchase bikes at a substantial discount. Also, many companies provide low emission cars under salary sacrifice schemes to their employees. Many companies have replaced their company car fleet with salary sacrifice cars. Following the Astra Zeneca decision, it is very unlikely that employers will introduce any more such schemes and will review their existing schemes.
In this case, Astra Zeneca offered employees £10 vouchers redeemable at selected shops. The employer gave the vouchers to employees in return for the employee giving up part of his or her remuneration - a "salary sacrifice". Employees benefited because the deduction from their salary for each £10 voucher was less than that amount (between £9.25 and £9.55 is deducted).
Astra Zeneca sought to reclaim the VAT charged by the supplier of the vouchers as attributable to its taxable business: - "input tax", whilst at the same time arguing that it did not have to account for VAT in supplying the vouchers to their employees.
HMRC argued that the VAT charged to Astra Zeneca was not recoverable as input tax. However, if it was recoverable, Astra Zeneca should seek to recover VAT on the supply to their employees.
The ECJ held that Astra Zeneca were required to account for VAT on a supply to employees, treating the amount of the salary sacrifice as VAT-inclusive consideration for the vouchers, but the VAT paid by the employer to the supplier of the vouchers was deemed recoverable.
Best practice
The ECJ made it clear that VAT was due on consideration for a supply of the vouchers equal to the salary sacrificed. HMRC therefore needs to overhaul its practice in relation to salary sacrifice schemes.
It is uncertain whether HMRC will seek to recover VAT underpaid for previous years, or will simply require taxpayers to change the treatment from now. In any case, employers and particularly HR professionals, will need to be aware of this decision and review their salary sacrifice and benefits arrangements.
For further information and advice concerning the treatment of salary sacrifice schemes, please contact Julie Davies on 0117 314 5347.
This publication is for guidance only. Reliance should not be placed upon it and nor should action be taken, without obtaining advice in respect of the specific circumstances applicable. We will be pleased to provide such advice or assistance.
