In 2010, the European Court of Justice (ECJ) ruled that AstraZeneca’s salary sacrifice scheme – which allows staff to exchange part of their salary for discounted retail vouchers – is accountable for VAT.
HMRC have clarified their position on the VAT ruling in a recent briefing paper, confirming that the taxman will treat sacrificed salary schemes in consideration for VAT, from 1 January 2012.
The ECJ said that by giving staff vouchers, which can be used to buy goods and services, AstraZeneca staff benefits represent a ‘supply’. Making the amount of salary sacrificed liable for value added tax.
Retail vouchers included in the scheme include shopping giants Sainsburys and Asda.
AstraZeneca previously bought such retail vouchers with VAT included and then recovered the tax before passing them on to employees.
Under new judgement, where a staff benefit is liable for VAT, input VAT is recoverable under normal rules. However, output tax will be due on the amount of salary an employee sacrifices.
For example; if salary sacrificed is of lower value than the benefit it is exchanged for, the higher value (in this case the retail voucher) will be liable for VAT.
Kevin Kinsella Jnr, of KinsellaTax, says:
“HMRC’s new VAT ruling will affect employers who have existing sacrificed salary schemes in place – landing them with a significantly increased VAT liability.
Employers offering staff salary sacrificed initiatives will be forced to readdress how they accountfor VAT on retail vouchers.
Many companies might find themselves being visited by the taxman, if they do not account for VAT when transferring benefits over to staff.”
HMRC and the ECJ’s decision is thought to potentially cost employers an extra £100m per year, plus an additional £500m should HM Revenue and Customs decide to collect VAT from the last four years.
The European Court of Justice (ECJ) is confident that the ruling will not result in a VAT strain for employers who pass the cost of vouchers plus on to staff.
However, HMRC’s VAT ruling could cost employees significant sums as salary sacrificed by employees is not currently liable for national insurance and direct tax deductions.
The judgement is likely to affect many companies that offer staff flexible benefit packages, including the ‘Cycle to Work’ scheme.
Anyone undergoing an nvestigation by HMRC should have strong and reliable representation from the outset.
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