A recent ruling of the European Court of Justice (“ECJ”) means that employers will have to account for VAT on retail vouchers provided to employees under salary sacrifice arrangements (Astra Zeneca UK Ltd v Commissioners for Her Majesty’s Revenue and Customs Case C-40/09). The ruling will affect any employer that provides retail vouchers, and potentially other types of benefit that would be subject to VAT, through salary sacrifice.
The ECJ’s view was that where an employer gives retail vouchers to its employees in return for a salary sacrifice the provision of the vouchers constitutes a supply of services by the employer to the employee for VAT purposes and, therefore, is subject to VAT. The result is that the employer must account for VAT on the vouchers provided to its employees, whether or not the VAT cost is passed on to its employees. However, depending on its VAT recovery position, the employer may be able to reclaim the VAT it pays to acquire the vouchers.
HM Revenue & Customs (“HMRC”) have not yet issued any guidance on the approach they will take to the judgment. It is likely that they will require employers to account for VAT on retail vouchers provided to employees in the future. What is not clear is whether or not HMRC will try to reclaim any underpaid VAT for previous years. In addition, it remains to be seen whether HMRC will treat the judgment as applying also to other types of benefit provided through salary sacrifice other than retail vouchers.
Until HMRC provide guidance on the effect of the ruling, employers operating salary sacrifice should consider two issues:
- whether or not a VAT charge will affect the value of the benefits provided to their employees; and
- whether the VAT charge will have a positive or negative effect on their VAT recovery position. If an employer’s VAT recovery position is likely to improve significantly as a result of the ECJ’s ruling it could consider making a protective claim for previous years for any additional input tax that is recoverable.
The ruling will not necessarily have a negative effect for employers but in each case an employer will need to look very closely at its position.
Cycle to Work scheme
As some additional salary sacrifice-related (and bad) news, HMRC have also issued recent guidance about what it views as an acceptable approach to valuing the sale of a bicycle provided under the Cycle to Work scheme. Currently, many employers sell bicycles to employees for as little as 5% of their initial value at the end of the bicycle hire period. HMRC’s published acceptable range in the recent guidance is between 16% and 25% for bicycles sold after 12 to 18 months. HMRC have indicated that any bicycle sold to employees below these values will be open to challenge and potentially subject to an employment tax charge. Employers should consider whether or not the way in which they operate the Cycle to Work scheme complies with this guidance.