United Kingdom
Is VAT a Sacrifice? - Marc Welby
Following a recent decision of the European Court of Justice (ECJ), employers face the prospect of paying VAT to HMRC on goods or services provided to employees under salary sacrifice arrangements. The case, involving Astra Zeneca Limited, concerned the VAT treatment of “retailer vouchers” provided to staff under a salary sacrifice scheme. The ECJ confirmed that the salary sacrificed by employees is consideration for the retailer vouchers they receive. As the supply of retailer vouchers is ordinarily liable to VAT, VAT is due on the salary sacrificed. The decision now throws HMRC’s long held policy of not treating a salary sacrifice as consideration for VAT purposes into touch.
Are employers exposed to VAT assessments on salary sacrifice arrangements? In my view it is (almost) inconceivable that HMRC would seek to assess organisations that have followed HMRC’s clearly set out policy, so there should be no retrospective exposure. What employers do need to do, however, is review the terms and conditions of any salary sacrifice arrangements they have in place. If VAT is chargeable going forward, can it be passed on to the employee? Will a difference between the dates employees signed up to a scheme lead to different VAT treatments?
Conceivably, indeed probably, yes. So, one employer, two employees, same bikes, but purchased at different times could result either in different costs to the employer or in different levels of sacrifices needing to be made, depending on who pays the VAT, employer or employee. If contemplating a new salary sacrifice scheme, there will be a need to ensure that the potential for VAT to be added to any sacrifices is made clear and that benefits are costed with VAT in mind.
Will all salary sacrifice schemes be liable to VAT? No. It is necessary to consider the VAT treatment of whatever it is that is being provided in return for the sacrifice. Pension sacrifice arrangements should remain unaffected by the decision. Similarly with childcare vouchers, either because they are credit vouchers or otherwise, the underlying provision of childcare is exempt from VAT. The provision of travel or medical insurance will be exempt. However, what if VAT is charged on the administration of such arrangements by third party administrators? In the case of a childcare retailer voucher scheme the VAT may be “exempt input tax”, which could give VAT recovery problems, increasing the effective cost of the scheme for the employer. On insurance products, exemption of the charges should be possible – but if VAT is being charged it should be looked at because you may be paying VAT needlessly (and incorrectly).
If you operate a salary sacrifice arrangements, you need to determine where you may have an exposure to account for output VAT going forward or may have an inability to recover input VAT in full. Re-evaluate the continuing benefits of the arrangements and evaluate any new ones, such as the green car scheme that was being considered. And are there alternative salary sacrifice benefits that would not result in a VAT charge or more VAT efficient remuneration planning and structuring available?
Looking backwards, if you have already been accounting for VAT on voucher schemes, have you recovered the VAT when you bought them? If not, consider a claim to HM Revenue & Customs (“HMRC”) for the VAT incurred over the last four years.
Finally, any attempts by HMRC to seek to assess VAT retrospectively should be robustly defended.