Summary and implications

The European Court of Justice (ECJ) has recently ruled that the part payment of salaries in retail vouchers is a supply for consideration by the employer to the employee for VAT purposes, and is therefore subject to VAT.

You should note that:

  • This is a disappointing decision for employers operating similar schemes, who will need to monitor whether they are accounting for the correct amount of VAT.
  • The case concerned a salary deduction rather than a salary reduction arrangement; these two arrangements have up to now been treated differently for VAT purposes.
  • It is not clear how HM Revenue & Customs (HMRC) will seek to implement this decision and therefore how far-reaching it will be; in the past, HMRC seems to have generally accepted that employers need not account for VAT on the amount of salary sacrificed.

Facts of the case

In Astra Zeneca UK Limited v HMRC, Astra Zeneca UK Limited (Astra Zeneca) offered its employees the option of receiving part of their salary in retail vouchers rather than cash. Retail vouchers were issued to Astra Zeneca (via an intermediary) at a discount. If an employee opted to receive a retail voucher rather than cash, the discounted amount would be deducted from the salary otherwise owed to the employee.

Astra Zeneca sought to reclaim from HMRC the input VAT incurred on the acquisition of the retail vouchers. It contended that (i) the acquisition cost formed part of its general overheads, and (ii) no supply for consideration was being made to the employees.

HMRC contested this analysis and issued assessments in respect of output tax due on the retail vouchers supplied the employees. Astra Zeneca appealed to the VAT and Duties Tribunal, which referred a number of questions to the ECJ.


On 29 July 2010, the ECJ (following the Advocate General’s opinion) ruled as follows:

  • In providing retail vouchers to its employees in exchange for them giving up part of their cash remuneration, Astra Zeneca was carrying out an “economic activity” and making a supply of services for consideration to the employees.
  • The burden of VAT should be borne by the end consumer, in this case the employees when they acquired goods or services with the retail voucher. The voucher necessarily included an amount of VAT, such amount having been deducted from the employees’ salary.
  • Astra Zeneca could recover input tax incurred on the acquisition of retail vouchers but it should account for output tax on the supply of those vouchers to the employees.


Although employers will need to review their current arrangements and may be disappointed with this outcome, the decision is unsurprising. In effect, the employer is supplying a retail voucher to employees in return for the employees agreeing to forgo an amount of cash they would otherwise have received as salary.

HMRC has in the past generally accepted that businesses could reclaim input tax on the acquisition of such vouchers but has not sought to assess for output tax in respect of an onward supply.

HMRC guidance on employee benefit schemes such as the “Cycle to Work Scheme” distinguishes a salary reduction (salary sacrifice) from a salary deduction. In the case of a salary reduction an employee accepts that his or her gross salary will be reduced. At the same time, he or she opts to receive benefits offered by the employer. The “reduction” does not represent consideration for a supply. The vast majority of salary sacrifice arrangements operate on this basis as it is necessary to achieve income tax and NIC savings. In the case of a salary deduction, a charge is made against salary in return for a benefit. This deduction is consideration for a supply and output tax is due from the employer.

The Astra Zeneca case does therefore not appear to do anything more than replicate HMRC’s current practice in respect of deductions from salary in a case which clearly seems to represent a salary deduction. And so, while employers have yet to see how HMRC will react to the decision in Astra Zeneca, it is thought unlikely this will lead to the end of (or even a material reduction in the use of) salary sacrifice schemes.