As part of the growing culture of flexible remuneration, many employers now offer salary sacrifice schemes to their employees. A number of these schemes involve the provision of vouchers in lieu of cash remuneration (for example, cycle to work schemes; retail vouchers). Until recently, HMRC had generally accepted that the provision of such vouchers was exempt from VAT. This was because, in HMRC’s view, providing employees with these vouchers did not amount to a supply of goods or services (an important element of the test for determining whether or not VAT is chargeable). In the recent case of AstraZeneca UK Ltd v. HMRC the ECJ has reached the opposite conclusion.  

When is VAT chargeable?

VAT is charged “on the supply of goods or services effected for consideration…by a taxable person…”. For these purposes a “taxable person” is a person/business which “independently carries out…any economic activity”. Employers are of course likely to be taxable persons (whereas employees will not be).

For businesses, VAT operates so that the VAT it has paid on goods and services (input VAT) is credited against VAT the business is obliged to charge to its customers, etc. (output VAT). It appears that, historically, businesses have claimed an input VAT “credit” on vouchers supplied to employees without accounting for output VAT. This practice appears to have been generally accepted by HMRC.


In summary, AstraZeneca operated a flexible remuneration package known as the “Advantage Fund”. This scheme allowed AstraZeneca’s employees to sacrifice part of their cash remuneration in exchange for retail vouchers with a face value of £10. The cost to the employee was between £9.25 and £9.55.

AstraZeneca did not charge output VAT on the provision of these vouchers to employees but sought to reclaim the VAT it had been charged on acquiring these vouchers (i.e., the input VAT) as a business overhead. AstraZeneca argued that providing vouchers did not amount to a supply of goods or services to the employees because there was an absence of consideration. HMRC disagreed, asserting that either:  

  • AstraZeneca was not entitled to deduct the input VAT; or, in the alternative,
  • AstraZeneca could deduct input VAT but was required to account for the output VAT.

HMRC therefore issued a tax assessment against AstraZeneca for the output VAT. AstraZeneca appealed to the VAT and Duties Tribunal in Manchester which, in turn, referred the case to the ECJ. The ECJ was asked to rule on whether the provision of vouchers amounted to a supply of services.  

ECJ Decision  

In a short judgment, the ECJ concluded that the provision of the retail vouchers was a supply of services for consideration and was chargeable to VAT. The ECJ confirmed that:  

  • there must be a direct link between the supply of services and the consideration received;  
  • it is settled case law that the VATable amount for the supply is represented by the consideration actually received; and  
  • it must be possible to express the consideration in money.

The ECJ held that these conditions were satisfied by the provision of vouchers to employees, stating that there was “no doubt that Astra actually receive[d] consideration for the provision of retail vouchers at issue….since it corresponds directly to a fraction of the cash remuneration of the employee.”


To date, there has been no comment from HMRC on the AstraZeneca case and it is therefore unclear how broadly they will seek to apply the judgment. This is particularly relevant in the light of its previous practice in not seeking the output VAT from employers on these schemes. While HMRC could decide to seek to recover output VAT which should have been paid since the inception of these schemes and/or future output VAT, it is possible it will refrain from doing so for political reasons. An example is the cycle to work scheme which was introduced under the (previous) government’s Green Transport Plan to “promote healthier journeys to work and to reduce environmental pollution”. It would rather undermine those important objectives if employers now cease to operate the scheme for VAT reasons.  

In the meantime, it is important to note that:  

  • it is hoped that childcare voucher schemes will not be impacted by the ECJ judgment. This is because, unlike retail vouchers, childcare vouchers can only be used to purchase services which are not subject to VAT;  
  • if the employer has not claimed input VAT on the acquisition of vouchers, the effect of the judgment should be neutral (albeit that such employers could now reclaim such VAT if the output VAT is charged).  

Next steps

Until HMRC makes its position known, employers should keep their salary sacrifice schemes under review and should:  

  • consider undertaking an evaluation to determine whether the financial impact of accounting for the output VAT means the provision of the scheme ceases to be viable; and,  
  • if so, review all documentation concerning the scheme and employees’ contracts to determine if and how cancellation/amendment of the scheme would be possible should the Inland Revenue decide to charge VAT.