Following a decision earlier this year from the Court of Justice of the European Union concerning Astra Zeneca and the correct VAT treatment to be applied in relation to its flexible benefits arrangements.
The Court found that the provision of vouchers was found to be a supply of services and, as such was input tax could be claimed, output tax was due on the consideration received from the employees. HM Revenue & Customs has now issued guidance as to the impact on this ruling and how it will impact on employers who make available benefits to their employees through a salary sacrifice or flexible benefits structure.
A salary sacrifice arrangement is where an employee forgoes part of their salary in return for the provision of a benefit, for example:
• Pension contributions
• Childcare vouchers
• Cycle to work
• Discount vouchers
The employee either enters into a new contract, or their existing contract is varied to reflect the change in their salary package.
VAT impact for employers
The impact of the Astra Zeneca case is that employers must account for output VAT on the amount of salary sacrificed by the employee for VAT-able benefits, thus increasing the cost to either employers or employees for the provision of these benefits. This is because the salary sacrifice arrangement is deemed to be regarded as consideration received for the provision of the benefit. However, where the costs of providing the benefit is less than the salary sacrificed then output VAT will only be due on the lower amount.
Whilst fully taxable employers will be able to recover the input VAT for the provision of these benefits, this will affect organisations that are unable to recover all of their VAT, effectively increasing the costs of providing benefits by up to 20%.
Output VAT will not be due on some of the more traditional benefits provided via salary sacrifice, such as pension contributions and childcare vouchers which are specifically exempt from VAT. Similarly, cars provided via a salary sacrifice arrangement where the input VAT has been blocked by the employer will not be affected . However, businesses providing exempt benefits may still need to reconsider their input tax position following these changes.
These changes will not come into effect until 1 January 2012.
Direct taxes impact for employers
HMRC has stated that there will not be any direct tax, for example income tax and National Insurance collected under PAYE.
Recommendations to employers
Salary sacrifice arrangements are intended to deliver a balanced remuneration package to employees. In most cases, employers will share a proportion of any savings in National Insurance with their employees.
However, following the statement issued by HMRC you may want to review your existing arrangements to see whether:
1. Are you providing benefits which employees’ value?
2. What are your competitors providing?
3. Do you need to review your partial exemption method?
4. What changes do you need to introduce prior to 1 January 2012?
Redburne is part of Mazars LLP and this article was written by Nick Bustin, Senior Manager in the Tax Investigations and Employer Solutions team.
For more infromaiton or advice please contact Redbourne.
