The European Court of Justice (ECJ) has ruled that employees must pay VAT on retail vouchers bought via salary sacrifice schemes.
In the case of AstraZeneca (C-40/09) the ECJ ruled that the employer must account for VAT on vouchers bought by staff through a salary sacrifice scheme. However, AstraZeneca is entitled to reclaim the VAT incurred on the purchase of the vouchers.
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 thereafter 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 in April, that AstraZenca is making a supply of services (of the vouchers) to its employees and it must account for VAT on the cash received (the salary sacrificed) for those vouchers.
This ruling now needs to come back to the UK government to decide whether to review VAT under salary sacrifice schemes.
Steve Hodgetts, VAT partner at Baker Tilly warns: “Many employers were shocked at the AG’s opinion delivered in April but have waited until this judgement was released before looking at their own salary sacrifice schemes.
“Now that this judgement confirms their fears, we recommend that they look at their salary sacrifice arrangements as a matter of urgency.
“It is likely to cost them a substantial amount of money as HMRC is entitled to assess employers for any output tax due over the last 4 years.”
However Alistair Kendrick, director – employment tax services at Mazars takes a different view: “HMRC may choose to review [VAT in salary sacrifice schemes], but they aren’t compelled to. And if they do they may be challenged.
“You can’t say the ruling means salary sacrifice is broken.”
See more on tax in salary sacrifice