HMRC recently published its much-anticipated VAT guidance on salary sacrifice schemes. With the new policy taking effect in less than six months, employers may need to rapidly redesign the terms of their salary sacrifice arrangements to deal with any extra VAT costs.
The guidance comes as a result of a European Court of Justice (ECJ) ruling in a case regarding pharmaceutical giant AstraZeneca. The ECJ ruled that AstraZeneca must account for VAT on high-street shopping vouchers bought by staff through its salary sacrifice scheme. However, AstraZeneca is entitled to reclaim the VAT incurred on the purchase of these vouchers.
The outcome of this case marks a departure from HMRC’s existing policy. Consequently, the decision to apply VAT on salary sacrifice arrangements from January 1, 2012, is a cause for concern for employers.
Businesses operating flexible benefits and stand-alone salary sacrifice arrangements will now face an additional cost.
For example, under the popular Cycle to Work Scheme, VAT will become due on an employee’s monthly salary sacrificed under the scheme. The question for employers will be whether or not they choose to pass this cost on to their employees.
However, not all benefits will be affected. Provided that the employer suffers a 100% or 50% VAT restriction on acquisition or leasing, company cars will remain unaffected by the new guidance.
While HMRC accepts that no VAT should be due on VAT-exempt benefits, any tax incurred in connection with the provision of these benefits, such as administration fees, is likely to become irrecoverable.
This may be relevant in the case of childcare vouchers where employers incur administrative fees from their voucher provider and have, to date, been permitted to recover VAT on these as an overhead cost; this will no longer be the case.
Where employees have already signed up to a salary sacrifice over a period extending beyond January 1 2012, contractual arrangements may need to be reviewed to see whether employers should bear any additional VAT or whether the amounts sacrificed by employees are able to be increased.
What is clear is that businesses will have to review their entire benefits package to work out whether there is any VAT impact and how this should be dealt with. However, with strategic planning and sound advice, it is possible to ensure salary sacrifice remains an attractive offering for employers and employees alike.
:: Stuart Savage is director in VAT for Deloitte in the North East