VAT treatment for salary sacrifice arrangements

By Tolley in association with Robert Woodward
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The following Employment Tax guidance note by Tolley in association with Robert Woodward provides comprehensive and up to date tax information covering:

  • VAT treatment for salary sacrifice arrangements
  • VAT treatment

VAT treatment

Since 1 January 2012, all new salary sacrifices where the underlying benefit provided is liable to VAT must at least equal the VAT inclusive cost of the benefit, otherwise the employer cannot claim the input VAT.

This does not apply to all benefits as some are VAT-exclusive (eg pensions), or specifically excluded from these provisions (eg company cars). In addition, not all employers can claim input VAT due to the services / goods they provide.

The background to the change followed the ruling by the European Court of Justice in the case bought by HMRC against Astra Zeneca. In short the European Court of Justice decided that the supply of retail vouchers to employees will be considered to be a supply’ for VAT purposes. This means that, where employers have recovered the VAT they have incurred on vouchers supplied to employees under a salary sacrifice arrangement, without accounting for VAT on the amount sacrificed by the employee, there could be a retrospective VAT cost to be met.

AstraZeneca UK Ltd v Customs and Excise Commissioners (C-40/09) [2010] STC 2298 (subscription sensitive)

HMRC published its guidance on how this impacts employers who provide benefits via salary sacrifice or in a flexible benefits scheme in Revenue & Customs Brief 28/11 

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