Flexible Benefit Arrangements and VAT
4 August 2010
Many employers offer their employees the option of sacrificing a part of their salary in return for a number of benefits that could include transport to and from work by bus, car parking, purchase of a bike etc.
In many cases the employer will look to recover any VAT charged on the cost of providing the benefit but most if not all will not have thought to account for VAT on the onward supply to the employee.
This would have been in accordance with HMRC policy but not anymore.
Astra Zeneca operated a flexible benefits package by offering retail vouchers in exchange for salary sacrifice. They attempted to reclaim the VAT on the purchase of the vouchers but did not account for any VAT when they were given to employees.
HMRC challenged this saying that VAT should have been accounted for when the vouchers were given to employees or alternatively Astra Zeneca were not allowed to recover VAT on the purchase of the vouchers.
The case was referred to Europe and the ECJ has ruled that by Astra Zeneca did make a supply of vouchers to its employees upon which VAT was due.
This ruling will affect salary sacrifice schemes and employers need to review their existing schemes or consider any scheme they are about to introduce to determine the VAT implications.
Whether or not HMRC decide to attack other schemes and ask for VAT retrospectively remains to be seen. It is anticipated that HMRC will issue a press release to explain their position.
Some benefits may escape a VAT charge as the supply to the employee is not in itself liable to VAT e.g. bus transport which is zero rated.
However any salary sacrifice arrangement needs to be reviewed to determine if the employer has a potential VAT liability and consider what can be done to mitigate that cost.
If you would like to discuss this further please speak to your usual contact or our Senior VAT Consultant:-
Steve Taylor
stevet@cooperparry.com