On 7 August 2019, the Upper Tribunal3 dismissed HMRC’s appeal and held that the operation of a salary sacrifice scheme by an employer did not constitute an economic activity for VAT purposes.
The employer (Pertemps) offered certain employees the option of participating in a salary sacrifice scheme. Pertemps provides permanent and temporary workers to clients. Employees of Pertemps working on temporary assignments were given the option of (i) being paid a ‘full’ salary, out of which they would have to meet their travel and subsistence expenses, or (ii) receiving a reduced salary but being paid their expenses. The amount of the reduction under option (ii) was the amount of the expenses plus a fixed amount of 50p or £1 per shift.
In the usual way, the salary sacrifice scheme offered tax and national insurance contributions (NICs) savings for the employees, and employer NICs savings for Pertemps.
HMRC’s view of the arrangements was that, for VAT purposes, Pertemps was making a taxable supply to its employees. The consideration for this supply, in HMRC’s view, was the 50p or £1 fixed amount (per shift) deducted from the salaries of participating employees.
The First-tier Tribunal had held that Pertemps did supply services to its participating employees, but that the operation of the salary sacrifice scheme was not an “economic activity” for VAT purposes (end result being, no VAT due).
The Upper Tribunal’s decision is one better for the taxpayer in that it agreed with the FTT that there was no “economic activity” here, but disagreed with the FTT on the question as to whether there was a supply at all for VAT purposes. In finding against HMRC on both legs of the two-tier approach set out in Wakefield College4, the Tribunal agreed that no VAT is due in respect of the salary sacrifice arrangements.
On the “economic activity” test, the Tribunal was not swayed by the arguments put forward on behalf of HMRC that there was a “general market” for the services provided by Pertemps under the salary sacrifice arrangements. The Tribunal held that Pertemps was simply acting as an employer, making tax and NICs deductions in accordance with the law. The fact that other employers did the same did not, in the Tribunal’s view, mean that there was a “general market” for the services that could support the position that Pertemps was providing the services for the purposes of obtaining income on a continuing basis.
On the “supply” question, the Tribunal’s view was that Pertemps did not supply anything at all in return for the payment of the 50p or £1 fixed amount. Rather than providing some sort of administrative services to participating employees (as HMRC argued), the Tribunal held that Pertemps was merely complying with its tax and NICs obligations.