HMRC Clarifies VAT Charges on Salary Sacrifice Arrangements
Justine Riccomini, Employment Tax Senior Manager, and Lynn Gemmell, VAT Director, comment on the implications for employers who operate salary sacrifice schemes, after the recent AstraZeneca case.
Background:
A VAT case, which was first heard last year (2010) has had a significant impact on employers engaging in salary sacrifice schemes, where the employee gives up salary in return for a benefit in kind.
The AstraZeneca case, which concerned itself with the provision of retail vouchers to employees using salary sacrifice, resulted in HMRC issuing a statement this week clarifying its position. From 1 January 2012, HMRC has stated that it will treat the provision of retail vouchers in return for salary sacrifice as “consideration” for VAT purposes.
What this means for employers:
This has caused much speculation and confusion amongst employers and tax professionals alike, which has resulted in many employers being fearful that if they operate salary sacrifice schemes and flexible benefit schemes which offer other benefits in kind such as bicycles, company cars, pensions, child care and retail vouchers, they will have to pay VAT on the amount of salary sacrificed. This is not necessarily the case. For one thing, child care vouchers are not subject to VAT and pensions are outside the scope of VAT. In addition, company car schemes should be unaffected by the changes as VAT is not normally recoverable on the purchase of company cars meaning that output VAT would not be due on an employee’s salary sacrifice; this will also apply to leased cars provided to employees (although 50% of the VAT on a leased car be recovered by the employer without the salary being affected).
Some salary sacrifice schemes will be affected however in addition to the retail voucher schemes outlined above.
Under the Cycle to Work Scheme employers purchase bicycles and safety equipment and provide these to employees. If a salary sacrifice arrangement has been used, the judgment means that from January 2012 employers must account for VAT on the salary forgone by the employee. Input VAT on the purchase will accordingly be recoverable. Where the cost of the bike has simply been deducted from employees’ salary, these arrangements are not affected by the new rules as payments received from employees have always been subject to VAT. VAT will also remain due on the final disposal of the bicycle to the employee based on market value rules.
Exempt income could create partial exemption situations for organisations that undertake affected schemes (for example where child care vouchers are provided). Advice should be taken on the potential impact this income might have.
What action do employers need to take:
In the coming months before the new rules are enforced, employers using the salary sacrifice schemes affected should check their schemes and decide whether they are going to bear the VAT cost or pass this on to the employees. Amended terms and scheme design may need to be considered and agreed with employees going forward. It may be the case that some flexible benefits schemes are no longer feasible and this also needs to be considered.
Please note:
As stated above, some common salary sacrifice items such as Childcare Vouchers, pension scheme arrangements and company cars are unaffected by this ruling. Employers should speak to their tax advisers and also look out for any announcements in the press or from their scheme providers. If HMRC implements new rules on any of the other popular salary sacrifice measures, it is clear from the AstraZeneca case that these rules would not be retrospective, but would be changed from a future date.
If you have any queries about salary sacrifice or VAT, please contact Lynn or Justine on 0131 558 5800.