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Nick Huber

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VAT changes could threaten salary sacrifice schemes

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From January 1 2012, companies will have to pay VAT on non-cash goods and services provided to employees in exchange for some of their salary, HMRC has announced.
 
According to Nick Huber, writing for our sister site www.AccountingWeb.co.uk, the change to the VAT treatment of salary sacrifice schemes, which often include such as bikes, childcare vouchers, and high street shopping vouchers, follows a ruling last year by the European Court of Justice (CJEU) over a tax dispute between AstraZeneca UK and HMRC (Case C-40/09).
 
The case involved retail vouchers provided to employees as part of a remuneration package. Astra bought retail vouchers at less than their face value and passed them on to employees at that discount – the cost of which was then deducted from their employees’ pre-tax salary.
 
The dispute with HMRC was triggered after Astra argued that it did not have to charge VAT on the supply of vouchers to the employees. The ECJ agreed with HMRC, ruling that the salary sacrificed was a supply of services in return for a payment and was therefore subject to VAT. Before the court ruling it was generally assumed that salary sacrifice schemes would not be subject to VAT.
 
In new guidance on VAT rules for salary sacrifice schemes HMRC says that the ECJ Astra ruling has wider implications for the VAT treatment of salary sacrifice schemes.
 
“It is clear that the principles applied by the CJEU are not confined to vouchers, but are equally applicable to many other situations where employers offer benefits to their staff,” HMRC says. “Where the benefit is subject to VAT, output tax will be due from, and input VAT recoverable by the employer in accordance with the normal rules.”
 
To allow businesses time to make the necessary adjustments, HMRC will not require output tax to be accounted for on taxable benefits provided under salary sacrifice schemes, until 1 January 2012, it said.
 
Nigel Harris, partner, corporate and client services at accounting firm Burton Sweet, said that
HMRC’s reaction to the Astra Zeneca decision will have have an “unfortunate knock on effect” on a range of employment payments and benefits, including cycle-to-work schemes and childcare vouchers.
 
The new rules will introduce some “unwelcome complications”, Harris said. “Companies offering childcare vouchers under salary sacrifice arrangements will have to apply partial exemption rules to the input tax on administrative fees charged by voucher providers, which could be a huge and disproportionate burden for very large employers.”
 
VAT remains due when a bicycle is disposed of and its value should normally be based on the price of an identical or similar item, taking into account the age and condition, HMRC says in its guidance.
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