VAT and employee salary sacrifice schemes

By Tolley

The following Value Added Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • VAT and employee salary sacrifice schemes
  • Salary sacrifice
  • HMRC's position following the decision in <span class="italic">AstraZeneca</span>
  • Agreements made on or before 27 July 2011

Salary sacrifice

In HMRC's opinion the term 'salary sacrifice' has a very narrow and specific meaning from a VAT perspective. It describes an arrangement such as in the Co-operative Insurance Society case where an employee elects to receive goods / services and agrees to sacrifice part of their salary in return for receiving the benefit. The employee will either enter into a new employment contract or have their existing contract amended to reflect the new arrangements agreed with the employer. Historically, HMRC have, accepted that the reduction in the salary did not constitute consideration for the benefits received and the employer was not required to remit output tax on the value of the benefit provided under the arrangement. However, employers were able to recover the related VAT subject to the normal rules. In cases where the employee has been provided with the use of goods (for example a home computer) and opts to purchase it at the end of the scheme, it has always been HMRC’s view that VAT is due (where applicable) on the sale of the computer at the time the transaction takes place.

Co-operative Insurance Society Ltd v Customs and Excise Commissioners VTD 7109 (subscription sensitive); VATSC05880; De Voil V3.114 (subscription sensitive)

See ‘VAT on salary sacrifice’ by Mark Groom in Tax Journal, Issue 1090, 22 (2 September 2011) (subscription sensitive).

It should be noted that HMRC has never considered that a 'salary deduction' arrangement has the same VAT treatment as a salary sacrifice arrangement. If an amount is deducted from an employee’s pay in return for a supply of goods or services by the employer, HMRC considers that VAT is due on the amount deducted from the employee's salary. The employer can recover VAT incurred on the purchase of the goods / services in accordance with the normal rules.


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