HMRC clarifies VAT charges on salary sacrifice arrangements

HM Revenue and Customs (HMRC) has issued guidance to employers around upcoming changes to the operation of salary sacrifice arrangements.

From 1 January 2012, value-added tax (VAT) will be imposed on the provision of several benefits offered via salary sacrifice, including bikes-for-work, car parking, company cars, computers, gym membership, and food and catering.

Where bikes-for-work schemes have been offered through a salary sacrifice arrangement, employers must account for tax based on the value of the salary foregone by the employee in exchange for the hire or loan of a bicycle.

Childcare vouchers are not subject to VAT, but tax incurred on the administrative fees charged by the provider is not recoverable.

In addition, benefits such as private medical insurance (PMI) and dental plans are not affected because they are exempt from VAT.

From 1 January, employers operating salary sacrifice arrangements will, unless the benefits are VAT-exempt, be required to account for output tax on the amount sacrificed by the employee. Employers will be able to recover the VAT incurred in providing the benefit, subject to the normal rules. Where the benefit is exempt for VAT, input tax on the provision of these benefits will be irrecoverable.

The value on which VAT must be paid will normally be equal to the amount forgone by the employee under these arrangements. However, in instances where the employer charges the employee an amount less than the original cost, the value of VAT will be determined by the cost incurred by the employer.

Mark Groom, partner in employment tax at Deloitte, said: “Employers have got a choice. They can either take it on the chin themselves and they either have to hand over the extra VAT to HMRC out of the money they are already getting from their employees. Going forwards it’s quite easy to set your sacrifice at the right level to make sure all your costs are covered if you want the employees to pay that VAT. Employers can say ‘if you want a bike, you can †sacrifice X plus 20% for the extra VAT. That’s easy, the hard thing relates to those employees who are already in a scheme.”

The new rules, however, will only apply to salary sacrifice arrangements where it is perceived that employees are buying benefits or services from their employer. Martin Sharratt, director and head of VAT at Smith and Williamson, said: “If employees have the choice of two contracts £30,000 a year plus a car and £35,000 and paying for you won car. By choosing one and not the other was not a payment by the employee to the employer for the car. HMRC adopted that as its official policy.

“If an employee [sacrifices] a bit of salary [in return for a benefit] as part of the deal the employee now has less cash, but the employee now gets included in their employee benefits free use of a gym, for example, or a company car on which they would otherwise have had to pay VAT if they bought it from a commercial organisation. Until this latest decision HMRC accepted that this was fine.”

The change in rules follow a judgement in 2010 by the Court of Justice of the European Union that found that Astrazenca was able to recover VAT incurred on buying retail vouchers, although employees in receipt of the benefits have to pay output VAT.

A statement from HMRC said: “Although this case was concerned with the supply of vouchers to employees the principles considered by the court are of general application and will apply to other supplied goods and services to employees.”

For more articles on the tax treatment of salary sacrifice benefits