On Thursday 28 July 2011, HMRC published its updated guidance stating that VAT needs to be accounted for on salary sacrifice payments from Sunday 1st January 2012.
For VAT purposes, “salary sacrifice” has had a very narrow and specific meaning. It describes an arrangement where an employee opts to receive services and forgoes part of their salary in return. The employee enters into a new employment contract or has their existing contract amended to reflect the new arrangement which they are tied into.
In relation to such schemes, HMRC have previously accepted that the reduction in the salary did not constitute consideration for the benefits received and output tax was not due. Employers were able to recover the related VAT as input tax, subject to the normal rules.
However, as a consequence of a recent case before the Court of Justice of the European Union relating to high street shopping vouchers being given in exchange for salary forgone, HMRC have interpreted the rationale used to mean that there is no longer a distinction between deductions from salary and a salary sacrifice.
When an item is sold to an employee after a period of use (e.g. a computer), HMRC’s view is that VAT always has been due on this sale.
The Court of Justice of the European Union’s decision is not confined to vouchers and is applicable to many other areas where employers offer benefits to staff.
Many employers have set up salary sacrifice arrangements for employees to forego salary in exchange for the hire or loan of a bicycle under the cycle to work scheme. Companies now have five months to implement the new VAT treatment.
This reduction in VAT benefit has followed last year’s publication of acceptable disposal value percentages when selling bicycles to an employee after a loan period.
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