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• From 1 January 2012, if employees sacrifice part of their salary for a benefit that is liable to VAT, output VAT will be due on the amount of salary sacrificed.
• VAT will be due on bikes-for-work schemes, home computers, mobile phones, gym memberships and retail vouchers.
• Childcare vouchers are exempt from VAT but, where employers incur administration fees, input VAT may not be recovered.
New HMRC guidance on VAT recovery means employers must take a close look at the benefits they offer under salary sacrifice arrangements, says Jennifer Paterson
Guidance issued by HM Revenue and Customs (HMRC) about VAT recovery on employee benefits has raised questions about which perks are affected.
The guidance, which comes into effect on 1 January 2012, follows a ruling by the Court of Justice of the European Union (CJEU) against AstraZeneca in 2010, which involved the VAT treatment of retail vouchers provided to staff under a salary sacrifice arrangement.
The pharmaceutical firm had bought the vouchers with VAT included and then recovered the tax before giving them to staff. The CJEU ruled that providing vouchers under a salary sacrifice arrangement amounted to a supply of services. AstraZeneca won its case to reclaim the VAT incurred on acquiring the vouchers, but output tax was due on the amount of salary sacrificed by its employees.
Although the case involved retail vouchers, the implications were deemed applicable to other goods and services supplied to staff. Martin Sharratt, head of VAT at Smith and Williamson, says: “After that case, HMRC had to think what other types of supplies might be caught by the same principle.”
The ruling has led to a change in VAT rules which will affect all UK employers. Where staff sacrifice part of their salary for a benefit, the employer will now need to look at that benefit and charge VAT where appropriate. If the benefit concerned is liable to VAT, then input VAT is recoverable but output VAT will be due on the amount of salary sacrificed.
Take advice on VAT
Employers that provide retail vouchers, bikes for work, home computers or mobile phones via salary sacrifice need to review their arrangements, says David Gubbay, tax partner at Dechert. “They need to look at the issues urgently, take advice on the VAT and the employment law issues, identify which benefits are affected, determine what the VAT treatment is and, if there is a VAT issue, decide who will bear that and, if necessary, amend the salary sacrifice scheme’s terms.”
Childcare vouchers are not subject to VAT, but if employers incur administration fees from their voucher provider, input VAT may not be recovered. Before the change, the employer would have been able to recover the VAT as a general business overhead.
Ian Carpenter, VAT partner at Baker Tilly, says: “The argument we are seeing advanced by HMRC is that the VAT on the administration charge relates to the supply of the exempt childcare voucher. The cost for the business will increase, but marginally.”
Alison Chalmers, director of Kiddivouchers, says: “For most employers, the impact will be very small. Compared to the national insurance savings on the scheme, we would expect it to be incidental.”
After releasing its brief on 28 July, HMRC was lobbied by benefits providers and has released a transitional agreement. All schemes joined post-28 July will be affected by the changes. Those joined on, or prior to, 27 July and which extend beyond 31 December 2011 can continue to be free from VAT until: the date a fixed-term agreement expires, the date of an employee’s annual salary or benefits review, or the date of any other change in the provision of benefits under salary sacrifice.
The cost of providing salary sacrifice arrangements will increase for employers, but they can pass the cost on to staff, share it with them, or get rid of the benefit altogether.
• Bikes-for work schemes: VAT will be due on the hire or loan of a bike and associated equipment through a salary sacrifice arrangement. However, an employer can continue to recover input VAT on the purchase. VAT remains due when a bicycle is disposed of at the end of the hire period.
• Home computer schemes, mobile phones, gym memberships and retail vouchers: Affected by the same principle as bikes for work.
• Childcare vouchers: Not directly affected because they are exempt from VAT, but VAT will not be recovered on administration fees.
Source: Dechert LLP
Read more articles from the Employee Benefits voluntary plans and tax-efficient benefits supplement 2011