In our August 2010 Review (PDF) we reported that that the European Court of Justice had ruled in Astra Zeneca that employers would have to account for VAT on retail vouchers provided to their employees under salary sacrifice arrangements because the supply of vouchers is treated as the supply of services to the employees for VAT purposes.
HM Revenue & Customs has now published guidance HM Revenue & Customs: Revenue & Customs Brief 36/11 on the approach it will take to the decision. It states unsurprisingly that where the benefit provided under a salary sacrifice arrangement is subject to VAT, VAT will indeed be due from the employer on the value of the benefit.
This means that benefits such as retail vouchers and bicycles provided through salary sacrifice arrangements will generate a VAT liability for employers. Benefits that are not otherwise subject to VAT (e.g. childcare vouchers) will not do so, although do note that it will no longer be possible to recover VAT on administration fees charged by a provider of childcare vouchers.
There is some limited good news of sorts in relation to timing. HMRC has announced that these new rules for salary sacrifice arrangements will only apply from 1 January 2012 in order to allow employers time to change their VAT accounting processes. In addition, it has unveiled the transitional rules that will apply to existing arrangements. Arrangements entered into on or after 28 July 2011 will be subject to the new VAT rules from 1 January 2012 but those put in place before 28 July 2011 will continue to be free from VAT until the earliest of:
- when an employee’s fixed term agreement expires; or
- an employee’s annual salary/benefits review; or
- any other review or renegotiation that changes the benefits of a salary sacrifice agreement or changes an employment contract.
Employers affected by the changes now need to decide whether they will pass on any VAT cost to their employees or bear it themselves. This decision will be affected by a number of factors. For example, employers will need to consider whether their existing salary sacrifice arrangements allow them to make additional deductions in respect of VAT if they do wish to pass on the cost to employees and, if they cannot, whether or not they wish to take the possibly difficult industrial relations step of amending their employees’ terms of salary sacrifice in order to do so.
They will also need to identify which of the benefits they provide under salary sacrifice will be subject to the new rules from 1 January 2012 and, therefore, which will generate a VAT liability requiring any change in their VAT accounting processes.