News analysis: The taxman rides again

Opinions are divided over how new VAT rules for benefits offered via salary sacrifice will affect perks such as bikes for work, says Nicola Sullivan

Debate is raging over how employers and employees will be affected by the new ruling on applying VAT to benefits offered through salary sacrifice. Last month, HM Revenue and Customs (HMRC) confirmed that from 1 January 2012, VAT will be imposed on goods and services offered via salary sacrifice, including bikes for work, car parking, company cars, computers, gym membership, and food and catering.

The change in rules follows a 2010 judgment by the Court of Justice of the European Union, which ruled that pharmaceutical company Astrazeneca could recover VAT incurred on buying retail vouchers, although employees receiving the benefit had to pay output VAT.

Childcare vouchers are not subject to VAT, but tax incurred on the administrative fees charged by providers is not recoverable. Benefits such as private medical insurance (PMI) and dental plans are not affected because they are exempt from VAT.

Martha How, reward principal at Aon Hewitt, said employers should not be unduly influenced by information from bikes-for-work providers suggesting employers may be forced to hit staff with extra VAT charges unless they use their services. “The employer effectively buys the voucher from the provider and then passes it on to the employee,” said How. “Historically, the employer has been entitled to claim back the VAT on that, but what the ruling, and the tax guidance, says is that the employer can no longer claim that VAT back, so the hit here is on the employer, not the employee.”

But Charles Ashwell, corporate sales manager at Halfords Cycle2work, disagreed: “In essence, this decision introduces a new charge for the employee, who will have to pay output VAT on the onward loan of a cycle from their employer. All VATregistered employers can now recover input tax on the purchase of the bicycle and accessories as it is directly linked to onward supply to an employee. The only organisations this ruling does not affect are those that are not VAT registered.”

Bikes-for-work provider Cyclescheme said that where employers currently pass on a VAT saving, employees’ savings will be reduced, but not by 20% (the VAT rate). This is because the increase in gross salary sacrifice created by the additional charge will result in income tax and NI savings.

As regards car salary sacrifice schemes, the ruling will only affect the maintenance cost of cars offered via salary sacrifice and not the financing of these, said Nathan Male, Deloitte’s director of global employer services. “For the financing of the car, there is already a block on VAT recovery, so there is no need to charge VAT to the employee. Looking at the financing of the car, there is effectively no change based on the guidance.

“We are assuming most employers will look to pass that VAT on to the employee by including it in their sacrifice. The feeling is, it will not make car salary sacrifice unattractive to staff, it will just reduce the overall benefit slightly.” Employers that set up new salary sacrifice arrangements will find it easier to do so at the right level, so all costs, including the additional VAT, are covered. It will be more challenging to communicate the extra charge for staff who are already in such schemes.

Martin Sharratt, director and head of VAT at Smith and Williamson, said: “If an employee sacrifices salary [in return for a benefit], they have less cash, but they have included in their [package] free use of a gym, say, or a company car on which they would otherwise have had to pay VAT. Until this latest decision, HMRC accepted this was fine.”

Read more about VAT and salary sacrifice arrangements