VAT on salary sacrifice

Following the European Court of Justice (ECJ) decision in 2010 that retail vouchers provided through a salary sacrifice arrangement was chargeable to VAT, HM Revenue & Customs (HMRC) have been deciding on what impact the ruling has on other benefits provided by means of a salary sacrifice.

HMRC has now published its long awaited views and in this edition of Tax Insight we reflect on the impact the ruling will have on flexible benefit/salary exchange arrangements for all employers.

General Summary

·        Benefits provided to employees free of charge (i.e. not through a salary sacrifice arrangement) will not be impacted;

·        Childcare Vouchers provided through a salary sacrifice arrangement will also not be impacted;

·        With effect from 1 January 2012, any salary sacrificed by employees in exchange for other benefits will potentially be treated as consideration for that benefit for VAT purposes.

·        Salary sacrificed in exchange for an expense (e.g. Travel & Subsistence arrangements) will not be treated as consideration for that benefit for VAT purposes.

·         Where the benefit is liable to VAT, then subject to normal rules, input VAT is recoverable but output tax will be due on the amount of salary sacrificed which is to be treated as consideration; and

·        If the cost of the benefit to the employer is more than the amount of salary sacrificed, output VAT will be due on the higher amount.

What Benefits are Most Likely to Cost More?

 a) Cycle to Work Schemes

The most common benefit likely to be impacted from 1 January 2012 is cycle to work schemes. Under the current rules, employers can provide cycles to basic rate employees at a discount of up to 65.8% at no cost to the business where all tax, National Insurance (NIC) and VAT benefits are passed on in full.

From 1 January 2012, VAT will be due on the salary sacrificed, reducing the maximum benefit to employees of 45.8%, but this generous discount will only apply if the Employer NIC saving has also been passed on to the employee – without this the effective cost of the salary sacrifice will result in a smaller, 32% discount.

b) Vouchers

As expected, VAT will continue to be due on face value vouchers.

 c) Canteen Arrangements

On the basis that from April this year, tax relief on subsidised meals provided by employers through a salary sacrifice arrangement was removed, it is unlikely that any schemes still exist but if so, they will be subject to output VAT on the amount of salary sacrificed from 1 January 2012, unless the food provided qualifies for zero-rating.

d) In–House Benefits

The biggest impact is likely to surround employers who provide their own goods or services to employees in return for a salary sacrifice.  Where the pay sacrificed is less than the value of the benefit, HMRC’s brief currently suggests that VAT will be due on the higher value – i.e. the value of the benefit itself.

e) Car Parking at or Near Work

Employers allowing employees to claim for car parking costs in return for a salary sacrifice arrangement may or may not have to consider VAT depending on the type of car parking involved as the VAT rules in this area are somewhat more complex than other benefits.

What Benefits Are Unlikely to be Impacted?

As mentioned above, Childcare Vouchers will continue to remain exempt from VAT. In addition, employers offering Low CO2 or other cars in conjunction with a salary sacrifice won’t be affected provided that the employer’s input VAT on leasing or acquiring cars is blocked (by either 50% or 100%).

What should Employers be doing now?

Any employer currently providing benefits through salary sacrifice should urgently consider the following action plan:

1. Review all existing benefits and determine if the new VAT charge will be due;

2. Decide if the additional cost should be met by the employer or employees;

3. Review existing scheme rules to ensure that changes can be made where appropriate to salary sacrifice levels to either increase from January 2012 or accelerate payments before the deadline;

4. Introduce new rules for schemes which allow employees to opt for new benefits between now and 1st January;

5. Redesign scheme rules for benefits which can be taken from 1st January 2012; and

6. Determine a process for ensuring that VAT is correctly accounted for on salary sacrifice arrangements.

Should you have any queries or wish to discuss the options available in more detail, then please do not hesitate to contact any of the Cobia team.