In Pertemps Limited v HMRC1 , the First-tier Tribunal (FTT) has held that a salary sacrifice scheme providing travel and subsistence expenses to employees was not an economic activity for VAT purposes.
Pertemps Limited (the taxpayer), was a recruitment agency which introduced a “Mobile Advantage Plan” (MAP) to provide eligible employees with travel and subsistence expenses by way of salary sacrifice. The employees were flexible employees engaged by the taxpayer on indefinite contracts of employment. The employees were offered the opportunity to participate in the MAP. Any employees who took part agreed to a wage reduction, in return for the taxpayer making the payment for expenses which was equal to the wage deduction.
To benefit from the MAP, expenses had to be “incurred wholly, exclusively and necessarily” in the performance of the duties of employment. Travel expenses were included so long as they were not “ordinary commuting” expenses to a “permanent” workplace. A workplace became permanent if the employee attended for a period of work lasting more than 24 months. Only employees who operated outside of a permanent workplace were eligible for the MAP.
HMRC argued that the MAP attracted VAT as it was a supply of service for the purposes of Article 2(1)(c), Council Directive 2006/112/EC (the VAT Directive).
The taxpayer appealed.
The appeal was allowed.
The issue for the FTT to determine was whether the MAP was a supply of services for consideration by the taxpayer to participating employees.
In considering this issue, the FTT followed the two-stage analysis set out in Wakefield College v HMRC2 : (1) whether there was a supply by a taxable person; and (2) whether that taxable person carried on an economic activity.
Was there a supply?
The FTT concluded that there was a legal relationship between the taxpayer and the employee. The legal relationship involved a reciprocal performance whereby the employee agreed to forgo remuneration in exchange for the MAP. As such, there was a valid supply of services pursuant to Article 2 of the VAT Directive.
Was an economic activity carried on?
In considering whether the taxpayer carried on an economic activity pursuant to Article 9 of the VAT Directive, the FTT noted that Wakefield confirmed that there must be a broad enquiry taking into account all of the circumstances in which the services are supplied. The essential test is whether the supply was made for the purpose of obtaining income on a continuing basis.
The FTT concluded that, despite resulting in an increase of profits as employment costs were reduced, the MAP did not provide an income stream to the taxpayer. Only the taxpayer could operate the MAP, so it was not a service that could be provided by a third party.
The principal supply was the supply by the employees of their labour in consideration for the remuneration and benefits provided by the taxpayer. However, in distinguishing Astrazeneca UK Limited v HMRC3 , the FTT held that the supply was ancillary to the fundamental elements of the employment relationship and not separate services outside a normal employment relationship.
The FTT therefore held that although the operation of the MAP was a supply pursuant to Article 2, it was not in itself an economic activity. The operation of the MAP was not therefore a supply subject to VAT.
This decision provides a useful analysis on when an activity constitutes an “economic activity” for VAT purposes. Although consideration of this question will be fact specific, the decision provides helpful clarification for businesses regarding the VAT treatment of salary sacrifice schemes involving expenses for employees who do not work in a permanent place of work and incur expenditure wholly, exclusively and necessarily for the purpose of performing their employment role. Businesses operating similar schemes should review their arrangements to ensure that the VAT treatment is correct.
A copy of the decision can be viewed here.