VAT and employee salary sacrifice schemes

Produced by Tolley
VAT and employee salary sacrifice schemes

The following Value Added Tax guidance note Produced 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
  • Cycle to work scheme
  • Face value vouchers
  • Childcare
  • Food and catering services supplied to employees
  • Motor cars
  • Benefits provided to all employees for no deduction or reduction from salary
  • Valuation
  • More...

IP COMPLETION DAY: 11pm (GMT) on 31 December 2020 marked the end of the Brexit transition / implementation period entered into following the UK’s withdrawal from the EU. At this point in time, key transitional arrangements came to an end and significant changes began to take effect across the UK’s VAT and customs regime. This document contains guidance on subjects potentially impacted by these changes. Before continuing your research, see the Brexit — overview guidance note.

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.

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

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 conside

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