Wed, 3 Aug 2011
Salary sacrifice arrangements will now be subject to value added tax (VAT) following a Court of Justice of the European Union (CJEU) ruling, HM Revenue & Customs has announced.
From 1 January 2012, employers offering schemes such as cycle to work will have to account for the output tax based on the value of the salary surrendered by the employee in exchange for the hire or loan of a bicycle.
Childcare vouchers will also be affected, as employers may no longer be able to recover VAT incurred through administrative fees to childcare voucher providers.
Barry Stocks, partner at Longboat VAT Advisers LLP, said the change could cost employers over £100 million extra each year.
‘This seems to be a case of giving with one hand and taking it away with another,’ said Stocks.
‘It’s not just the cycle-to-work scheme that has been hit - it is other salary sacrifice schemes - employers operating such schemes should be reviewing them to prepare for the change.
‘It has been estimated that the cost to employers could be over £100 million per year.’
The CJEU case of AstraZeneca investigated the company’s flexible remuneration package scheme which offered high street shopping vouchers as an alternative form of remuneration.
It found that the provision of vouchers by the company to its staff was directly linked to the amount of cash remuneration employees gave up, and so an output tax was due.
HMRC said the principle extended beyond voucher schemes, and has applied the ruling to other salary sacrifice schemes.
‘HMRC considers that the rationale used by the CJEU goes wider than deductions from salary, and as a consequence of this there is no longer a distinction between deductions from salary and a salary sacrifice,’ said the Revenue.
‘Therefore, the amount of salary foregone is consideration for supplies of the benefits whether provided under a salary sacrifice or by a deduction from salary.’
Other schemes affected by the decision include food and catering provided by employers and motor cars.