As mentioned in my post of earlier today, Her Majesty’s Revenue & Customs (HMRC) have recently issued some guidance on the VAT treatment of different benefits supplied under Salary Sacrifice schemes. This follows a European Court decision last year in a case against Astra Zeneca.

The new guidance makes it clear(er) where VAT will apply to such schemes.

I should perhaps caveat that this document is relatively fresh, and there is bound to be much testing and interpretation of the rules over the coming months and years, but we thought that this was important enough that we should at least give some early indication as to what this means for those that use Salary Sacrifice with employee benefits.

I would also like to highlight that the headline may in fact be bigger than the impact for most employers. That’s not to say this should be ignored, but in reality the change for many employers will be relatively minimal (or possibly no change at all).

The changes come into force on the 1st January 2012, and for more detail the link to the HMRC document is here https://www.hmrc.gov.uk/briefs/vat/brief2811.htm

For simplicity, I thought we should limit this post to the principle usage of Salary Sacrifice schemes for employee benefits in the UK, which are Childcare Vouchers, Cycle to Work and Pension schemes.

Childcare Vouchers

Childcare Vouchers are almost certainly the most common usage of Salary Sacrifice by employers, and will remain largely unaffected. The only area of change apparent at present would be on the administrative fees charged by the voucher providers to the employer. These will be subject to VAT.

As long as the employer currently pays VAT, then this could be an extra cost. In reality, I suspect that most businesses expected to pay VAT on such payments anyway, so for most employers this is no change. Worth flagging with the FD though just to be sure.

The link above gives the exact details on this point for those FDs interested.

Cycle to Work/ Bikes for Work schemes

This is a more significant impact. From the 1st January 2012 employers must account for VAT on the supply of bikes made available to their employees under such schemes. Again much will depend on whether your business is VAT registered.

If you are an employer that falls into this category, you may wish to pass the extra cost on to the employees in a variation of the salary sacrifice agreement. Alternatively, you may just opt to absorb the extra cost instead of passing this on.

Either way you have a few months ‘window’ before the deadline date in which to consider your best response to this.

Pensions

The HMRC guidance does not even mention pensions, and that conforms with the industry’s understanding that pensions remain unaltered by this. As such, no service is being provided (it’s just a pension contribution from the employer rather than a service or voucher), so there should be no real implication here.

Pensions are of course largely tax-advantaged, which is another significant plus to this argument.

Clearly, if you are paying fees for your pension services these will be subject to VAT in the usual way (no changes there).

Other Benefits

There are a variety of other benefits that could/ will be impacted, and should you have any queries please contact your usual Jelf consultant for details.

Best regards

Steve