Important changes to VAT treatment of the salary sacrifice scheme

Organisations may have remuneration arrangements where employees can opt for a salary deduction for goods or services that are provided by their employer. Alternatively goods or services can be provided for by a salary sacrifice. Under a salary deduction arrangement, the cost of the goods or services is deducted from the existing salary. Under a salary sacrifice scheme the salary is reduced by an amendment to the employment contact to reflect the cost of the goods or services provided. Up to now, each method was treated differently with regard to VAT.  

Following a recent European Court case, HM Revenue & Customs (HMRC) now considers that there is no longer a distinction in VAT terms between the salary deduction and salary sacrifice schemes.   

This now means that the value of any benefit, for VAT purposes, will be the same as the amount deducted from the salary or, under a salary sacrifice arrangement, the amount of salary foregone. If this is less than a true value, the value will be based on the cost to employer.  

Benefits which avoid output VAT  

Childcare vouchers are not directly affected by the judgment as they are not subject to VAT as the provision of childcare is exempt.  

Where employees pay for meals, snacks or drinks, this is a taxable supply and liable to VAT.  However, if employees do not make a payment, VAT is not due (provided the benefit is available to all staff).

Businesses have until January 2012 to implement the change  

In order to allow businesses time to make the necessary adjustments to their VAT accounting arrangements, HMRC will not implement the required changes until 1 January 2012.   

HMRC does not consider that European Court judgment affects the existing published guidance on wider employment income tax issues and so this guidance will not be amended.  

If you have any questions please contact our specialist advisers.

Peter Bright - VAT Director
+44 20 7556 1335
brightp@buzzacott.co.uk

Andrew Norman - VAT Manager
Charity and Not-for-Profit team
+44 20 7556 1366
normana@buzzacott.co.uk