VAT ruling affects salary sacrifice schemes

SALARY SACRIFICED by employees in exchange for a benefit will be treated as consideration for VAT purposes following a HM Revenue & Customs briefing paper clarifying its position.

In 2010, in a case involving pharmaceutical company AstraZeneca, the European Court of Justice (ECJ) decided that salary sacrificed by employees, in exchange for retail vouchers provided by their employer, was consideration for VAT purposes. This would affect employers that operated flexible benefits, such as the cycle to work scheme.

An HMRC update confirmed that the taxman would treat the salary sacrificed as consideration for VAT from 1 January 2012. Where the benefit is liable to VAT, then input VAT is recoverable as under normal rules but output tax will be due on the amount of salary sacrificed. According to the brief, if the benefit is of higher value to the salary sacrificed, the higher amount will be subject to VAT.

Mark Groom, tax partner at Deloitte, said that employers would have to make decisions about whether they or their employers would have to bear the cost. He added: "If the employer is not prepared to bear this cost: [it must]: review scheme design and amend terms to cover the increased VAT cost going forward; and review existing agreements with employees and decide whether benefits and/or salary sacrifice amounts should and can be amended for the balance of the period of any existing agreements."