Salary sacrifice schemes have been popular in recent years, proving a godsend for working families by providing creches or childcare vouchers and hungry workers with workforce canteens provided by the schemes. However the pre budget report’s attack on salary sacrifice workplace canteens may hint at a sea change for tax status over salary sacrifice.
Aside from those receiving £25,000-plus bonuses and the planned 2011 increase in National Insurance Contributions, an otherwise quiet Pre-Budget Report for employment taxes (click this link to see coverage from our sister site, AccountingWeb) included an ominous anti-avoidance measure for fans of salary sacrifice and flexible benefits schemes.
PBR Press Notice PN25 set out plans to remove the tax exemption in ITEPA section 317 covering situations employees take a cut in their remuneration to fund the purchase of food and drink at work. The move to close down salary sacrifice-funded workplace canteens could herald a more widespread anti-avoidance campaign, warned PKF employment tax and rewards partner Philip Fisher.
The existing legislation allows an employer to provide free or subsidised meals in a canteen as long as certain conditions are met, but the government has lost its patience with salary sacrifice or flexible benefits arrangements designed to take advantage of this exemption and pay for meals out of gross pay to avoid income tax and NICs.
The proposed amendment will prevent the exemption from applying if the subsidised meals are linked to a salary sacrifice or flexible benefits arrangement where employees take a pay cut and are provided with food and drink of an equivalent value.
The new measure will take effect on 6 April 2011, but the section 317 exemption will sill apply to general subsidies for canteens that are available to all employees, for example if an employer provides a general subsidy that is reflected in lower prices in its canteen.
The PKF employment tax and rewards partner said the government was “dipping a toe into the water” for potentially far wider ranging anti-avoidance measures in the future.
“For the sake of argument, if you have a ‘tax scam’ based on a workplace canteen, the government will cry foul. Having got this to work, they might extend it to other salary sacrifice schemes,” Fisher warned.
Canteens are generally there to help employees, but similar benefits such as crèches and pensions could be covered by the same principle. “It could grow into something that begins to affect all manner of flexible benefit schemes,” Fisher said.