HMRC has announced changes to the VAT treatment of the provision of employee benefits in return for salary sacrifice from 1 January 2012, which may increase the overall cost of these schemes. This is a result of the decision of the European Court of Justice (ECJ) in the Astra Zeneca case regarding the correct VAT treatment of high street shopping vouchers provided to employees as one of the options of the scheme.

The ECJ found that the provision of vouchers amounted to a supply of services provided in return for consideration. As a consequence, Astra Zeneca was able to recover VAT incurred on acquiring the vouchers, but VAT was due on the salary sacrificed by its employees. Until 31 December 2011, HMRC will continue to treat the salary forgone as not representing consideration for a supply (except in the case of high street vouchers). With effect from 1 January 2012, the position adopted by the ECJ will apply and VAT, where appropriate, will be due. This means that HMRC will no longer make a distinction between ‘deductions from salary’ and a ‘salary sacrifice’ and VAT, where applicable, will now have to be paid on the salary sacrificed by the employee. The cost of the scheme will either increase for employees, or for the employer if the employer is unable to pass on the additional VAT cost to their employees.

Typical arrangements include cycle-to-work schemes and home computers, but may also include food and catering, as well as high-street vouchers. Many organisations which suffer a restriction on their VAT recovery, including charities, education and the financial sector, will now benefit from VAT recovery on these goods and services. Non-VAT registered businesses will need to be aware that salary sacrifice schemes will count towards the VAT registration threshold and the potential requirement to register for VAT. As childcare is exempt from VAT, the supply of childcare vouchers, and other VAT-exempt benefits will not be directly affected but VAT recovery on associated costs may be restricted. VAT zero-rated benefits, which could include books or cold takeaway food, will also not be affected and the employer will be afforded a full recovery of input tax on underlying costs.