VAT changes hit scheme

IAN MARROW of Baker Tilly warns that salary-sacrifice benefits will cost more in the future following changes in VAT rules

HER Majesty’s Revenue & Customs (HMRC) has announced changes to the VAT treatment of the provision of employee benefits in return for salary sacrifice.

From January 1, 2012, businesses that use this scheme will need to be aware that VAT, where appropriate, will be due, potentially increasing the overall cost.

Affected employers will need to determine if they will absorb any additional costs or to pass them on to their employees.

This change stems from the European Court of Justice decision in the Astra Zeneca case regarding the correct VAT treatment of high street shopping vouchers via salary sacrifice.

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The European Court of Justice found that the provision of vouchers amounted to a supply of services provided in return for consideration.

As a consequence, Astra Zeneca was able to recover VAT incurred on acquiring the vouchers.

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However, VAT was due on the salary sacrificed by its employees.

Until December 31, 2011, HMRC will continue to treat the salary forgone as not representing consideration for a supply (except in the case of high street vouchers).

With effect from the New Year, HMRC will no longer make a distinction between ‘deductions from salary’ and a ‘salary sacrifice’.

VAT, where applicable, will now have to be paid on the salary sacrificed by the employee.

The cost of the scheme will either increase for employees, or to the employer if the employer is unable to pass on the additional VAT cost to their employees.

Typical arrangements include cycle to work schemes and home computers, but may also include food and catering, as well as high street vouchers.

Many organisations which suffer a restriction on their VAT recovery, including charities, education and the financial sector, will now be afforded VAT recovery on these goods and services.

Non-VAT registered businesses will need to be aware that salary sacrifice schemes will accrue towards the VAT registration threshold.

They also need to be aware of the potential requirement to register for VAT.

As childcare is exempt from VAT, the supply of childcare vouchers, and other VAT-exempt benefits will not be directly affected but VAT recovery on associated costs may be restricted.

VAT Zero-rated benefits, which could include books or cold takeaway food, will also not be affected and the employer will be afforded a full recovery of input tax on underlying costs.

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