What Vat On Salary Sacrifice Schemes Will Mean To Employers

Sept. 3, 2011 - PRLog -- As HMRC clarifies its position on the treatment of VAT for salary sacrifice schemes, employers may need to rapidly re-evaluate their options, in particular for childcare vouchers and cycle schemes, explain Employment Tax and VAT experts, Matthew Eady and Rebecca Parsons respectively, leading East Anglia Chartered Accountants, Peters Elworthy & Moore (PEM)
Following a case brought to the European Court of Justice (ECJ) by pharmaceutical giant AstraZeneca, which offered employees retail shopping vouchers as part of a flexible remuneration package, HMRC has announced policy changes which are likely to impact both employers and employees taking advantage of salary sacrifice schemes.
In the AstraZeneca case, the ECJ ruled that VAT must be accounted for on the vouchers bought by staff through its scheme enabling VAT to be reclaimed on the purchase of the vouchers by AstraZeneca.
Using this judgment HMRC has announced its new policy that amounts given up under salary sacrifice schemes are to be treated as consideration for a supply by the employer eliminating the distinction between a salary deduction, which has always been treated as consideration for a supply, and a salary sacrifice. In its Revenue Brief 28/11 on the subject HMRC has stated: “Businesses providing benefits under arrangement, which qualify as salary sacrifice schemes for VAT purposes, must account for output VAT on these supplies, where they are subject to VAT”.
The new policy, which takes effect from 1 January 2012, gives employers four months to review the terms of salary sacrifice arrangements and the impact the changes have on their particular schemes.
“Employers operating the cycle-to-work scheme which, subject to certain conditions being met, enables employees to obtain a bicycle in a tax-efficient manner, may have previously passed on any VAT recovered when the bicycle was purchased, to the participating employees. This will not be possible from 1 January 2012,” explains Matthew Eady, Employment Tax manager at PEM, “which will mean that the attractiveness to employees of a cycle-to-work scheme will be somewhat reduced”.
“It is important that all businesses offering any sort of salary sacrifice scheme are aware of the impact that this policy change has on its overall VAT position,” advises Rebecca Parsons, VAT Manager at PEM. “This change could actually create an obligation for unregistered businesses to register for VAT, even if its general business activities are exempt or its taxable income is otherwise below the VAT registration threshold. Missing this obligation could be costly with the penalties HMRC can impose for late registration.”  
Rebecca further warns that those employers offering childcare vouchers that, whilst the tax and National Insurance contributions treatment is unaffected by the policy change, under the new policy employers that are subject to the partial exemption rules may not only lose VAT on any administration costs of the childcare voucher provider but may also now suffer a restriction of the VAT they incur on their general business running costs. With just four months before the change of policy takes effect it is important for businesses offering childcare vouchers to act now and put arrangements in place to minimise any VAT restriction resulting from it.
Whilst salary sacrifice schemes remain attractive and continue to be taken up by employers and employees it is vital that businesses seek advice on the VAT and tax implications now so that any strategic planning action can be taken in advance of the changes.
If you would like to discuss the specific impact of these changes to your business please contact Matthew Eady on 01223 728292 meady@pem.co.uk or Rebecca Parsons on 01223 728254 rparsons@pem.co.uk
www.pem.co.uk
ENDS
________________________________________Notes to Editors
•   Peters Elworthy & Moore (PEM) is one of the leading independent firms of accountants, tax and business advisers in the East Anglia region, with 14 Partners and 140 staff.

•   PEM is within the top 60 in the UK, providing financial strategies for success.

•   PEM has a large and varied client base including a substantial portfolio of technology and owner managed business clients. Visit http://www.pem.co.uk and www.pemtechnology.co.uk

•   PEM has been awarded the Kreston International Business Referrer of the Year Award for 2010. Founded in 1971, the Kreston organisation offers reliable and convenient access to quality services through its member firms located around the globe. To learn more, visit www.kreston.com

•   The HMRC brief can be viewed at www.hmrc.gov.uk/briefs/vat/brief2811.htm
Media contact: For information, interviews or images please contact Mobas PR
T: 01223 841699 Hellena Barnes or Suzie Young
E: hellena.barnes@mobas.com / suzie.young@mobas.com

# # #

Cambridge based business advisors and chartered accountants providing audit, accounts, business tax, personal tax and payroll services.