Astra Zeneca offered its employees a remuneration package consisting of cash and, as appropriate, certain benefits selected by its employees. It was understood that each benefit chosen by the employee would result in a deduction from the employees' cash entitlement. Benefits, amongst others, included retail vouchers which employees could use in retail outlets.

Astra Zeneca paid VAT on the acquisition of the vouchers, but did not recover this VAT in its VAT returns; nor did Astra Zeneca account to HM Revenue & Customs ("HMRC") for VAT in respect of the provision of vouchers to its employees. However, Astra Zeneca subsequently submitted a claim to HMRC for the VAT it had incurred on the cost of the vouchers. HMRC issued assessments for VAT not accounted for by Astra Zeneca on the supply of vouchers to employees.

Analysis and implications

HMRC have not, prior to the Astra Zeneca case[1], sought to recover VAT on certain benefits provided to employees as part of their remuneration packages where the employee has also agreed to a reduction in salary.

The European Court of Justice considers that such practice was not the correct position and, in fact, held that there is a direct link between the voucher provided by Astra Zeneca to its employees and the employees' sacrifice of their cash entitlement, the value of such sacrifice being the consideration, which is subject to VAT.

Employers should consider whether any such voucher or similar salary sacrifice schemes they operate give rise to an unexpected VAT liability. In situations where the sacrifice made by the employee equals the gross acquisition cost of the voucher by the employer there should be no additional VAT cost for an employer, assuming that is the employer has recovered VAT incurred by it on the purchase of the vouchers. However, there are situations where there could be a VAT cost for the employer and existing schemes should be reviewed to ensure this risk is managed and/or the correct amount of VAT accounted to HMRC, which could be significant depending on the circumstances. Conversely, there may also be opportunities for VAT recovery from HMRC.

HMRC have yet to respond to the Astra Zeneca case, but there is a real prospect that HMRC could assess employers for up to four years' worth of undeclared VAT.