Debi O’Donovan
July, the European Court of Justice ruled that VAT is due on retail vouchers which are bought by employees via salary sacrifice schemes. This has caused a bit of a flap in some parts of the benefits industry because of fears it will affect other perks as well. This is because a number of products that currently work well in salary sacrifice schemes depend on having a VAT ’break’ to make an effective saving, for example bikes for work, childcare vouchers and company cars.
To put all this in context it is it worth looking at the ruling itself, which was against AstraZeneca. Although ECJ ruled that AstraZeneca must account for VAT on vouchers bought by staff through a salary sacrifice scheme, it is entitled to reclaim the VAT incurred on the purchase of the vouchers.
Originally, following advice, AstraZeneca had sought to reclaim the VAT incurred on the vouchers on the basis that they were a business overhead cost. The HMRC view was that AstraZeneca was either not entitled to reclaim this input VAT, or if it was entitled to reclaim this VAT, it must account for output VAT on the value of the vouchers provided to the employees that is, on a sum equal to the salary sacrificed by the employees to obtain the vouchers.
This ruling followed the advocate general’s (AG) opinion, which was delivered last April, that AstraZenca is making a supply of services to its employees and it must account for VAT on the cash received for those vouchers.
The ECJ ruling now needs to come back to the UK government to decide whether to review VAT under salary sacrifice schemes.
So what will this mean for employers? Some tax advisers are recommending a wholesale review of salary sacrifice schemes, while others suggest waiting to hear how HMRC react.
I would be surprised to see childcare vouchers and bikes for work schemes affected, given the advancement of these is part of government policy. One assumes tax officials looked into the VAT issue when they gave these benefits tax breaks in the first place.
However, it will be interesting to see if perks such as company car salary sacrifice will be affected given their rising popularity and resulting loss of tax revenue to HMRC.
The bottom line is – be weary of any tax breaks on benefits and implement them with your eyes open. And keep your eye open for how HMRC reacts to the ECJ ruling – it might have a big impact in the long term.
Debi O’Donovan is editor of Employee Benefits magazine
Simon Moore
The ECJ ruling that employers should pay VAT on retail vouchers handed out to staff as part of their salary sacrifice has certainly caused a stir in the employee benefits industry. There has been widespread speculation that other salary sacrifice schemes may be subjected to a review.
Childcare vouchers were one of the first benefits called into question. I have read a number of articles insinuating that HMRC will launch an investigation to decide if VAT should be applied to vouchers.
But customers and parents should be reassured that HMRC do not intend to apply this rule to Childcare vouchers. We received the following confirmation from HMRC.
’Businesses supplying childcare vouchers to its employees in similar circumstances to the provision of retail vouchers will not have to account for VAT on the value of Childcare Vouchers. This is because the supply of childcare is exempt from VAT’.
Of all salary sacrifice schemes, childcare is essential. As we move out of the recession it is vital parents are able to gain access to this resource that will facilitate their return to work at minimum cost to them and their employer.
What is of major concern now is the amount of VAT that can be recovered by businesses. No conclusion on this has yet been reached, but HMRC have informed us they are focussing on this.
When quizzed on the issue, HMRC offered the following comment: ’…. (it is) considering whether this will have an effect on the amount of VAT that the businesses can recover in respect of fees charged by Childcare Voucher Providers.
“Pending HMRC’s review of the case, businesses that provide their staff with Childcare Vouchers may continue to recover this VAT’.
With the review on the way, businesses should continue in their commitment to the provision of Childcare vouchers. With an increasingly buoyant market, there has never been a better time to provide incentives that will foster a committed and focussed workforce.
Simon Moore is managing director of Computershare Voucher Services