ECJ ruling puts VAT on salary sacrifice schemes

Drugs giant Astra Zeneca should pay VAT on retail vouchers given to staff that form part of a salary sacrifice scheme, the European Court of Justice (ECJ) has said. The ruling could derail some similar schemes.

Salary sacrifice schemes operate by allowing employees to receive vouchers or benefits instead of part of their salary. The schemes offer tax benefits, often allowing employees to buy goods or services with their income before tax is taken out.

Salary sacrifice is often used by parents to pay for childcare or by employees to buy bicycles and cycling equipment. Astra Zeneca's scheme offered employees £10 vouchers for certain shops.

The company claimed that it was permitted to claim back the VAT it had paid on the purchase of the vouchers, but not account for VAT when giving the vouchers to employees. HM Revenue and Customs (HMRC) disagreed.

The case is being heard by the UK Tax Tribunal, which asked the ECJ to clarify the meaning of certain parts of the VAT Directive to enable it to make its decision.

The ECJ said that giving retail vouchers to employees counted as a "supply of services", and is therefore subject to VAT.

"The result of this important judgment means many businesses could face significant VAT assessments if they have recovered VAT on retail vouchers which they provide to staff as part of a salary sacrifice scheme, but have not accounted for VAT on their supply," said accountancy firm Deloitte, which advised Astra Zenica in the case, in a statement.

The firm said that companies which offer salary sacrifice schemes will have to look at them again to make sure that they comply now and have no liability for past practices.

"This is a significant case looking at the complex tax treatment of vouchers and salary sacrifice schemes," said Deloitte's Giles Salmond. "Large employers which use retail vouchers as part of any salary sacrifice arrangement for staff may now have to revisit how they deal with the VAT accounting on these vouchers."

Experts have warned that the ruling could mean that companies will have to pay an extra £150m to HMRC in VAT to keep schemes running.

Jon Robinson, a tax specialist at Pinsent Masons, the law firm behind OUT-LAW.COM, said that the ruling could affect a large number of firms.

"Any VAT recovered on the acquisition of the vouchers will be nullified by a corresponding VAT charge on the transfer of the vouchers to employees," he said. "Several employers will have been proceeding on the same basis as Astra Zeneca, recovering VAT on the acquisition of the vouchers but not accounting for VAT when providing them to employees. They may face significant assessments for unpaid VAT from HMRC.”

Robinson also said that the ruling could affect other salary sacrifice schemes, not just those that provide retail vouchers.

Following the ECJ's reasoning “it could be argued that the provision of almost any benefit, not just vouchers, under a salary sacrifice scheme is a supply for which the employee has 'paid' by giving up some remuneration, meaning other types of salary sacrifice could also give rise to VAT liabilities for employers and potential assessments by HMRC if HMRC seek to apply this ruling as widely as possible," he said.

Accountancy firm PwC said, though, that while some kinds of benefit may be more complicated, the provision of company cars via salary sacrifice measures should be safe in the UK.

"The UK has specific measures in place which prevent taxation of salary reductions in respect of company cars," said Gary Hull, an employment solutions partner at PwC. "This will need to be amended if salary sacrifice cars are to be impacted by the decision. In addition, the UK input tax blocking provisions, which restrict input tax deduction on cars, already provide a means of taxing private consumption where those cars are made available for private use. Given that the private consumption on cars is already effectively taxed, there would appear to be no compelling requirement to amend this provision unless there was a corresponding amendment to the input tax blocking provisions to allow input tax recovery by employers in full," he said.

"Pending HMRC publishing its views, businesses need to be aware of the ECJ's judgment and consider any potential impact on salary sacrifice arrangements in place," said Hull. "In respect of cars provided by means of salary sacrifice, employers should be able to rely upon the UK domestic legislation to maintain the current treatment."

OUT-LAW.COM is part of international law firm Pinsent Masons.