Salary sacrifice schemes, which offer employees selected benefits that are deducted from their salary, look likely to be far less popular with employers following a ruling from the European Court of Justice. The court has ruled that (most) benefits provided to employees under salary sacrifice schemes are VATable.

The employer in this case offered the benefit of retail vouchers worth £10 to be used in certain shops, with around £9.55 being deducted from the employee's salary. The Court has recently agreed with HMRC that the employer could not claim reimbursement of the input VAT included in the price of the retail vouchers, as the provision of a retail voucher constitutes a supply of services which is VATable. Such schemes should therefore be carefully considered to clarify their VAT status and ensure they represent good value for all parties.

Astra Zeneca UK v HMRC.