VAT and salary sacrifice: Essentials for business owners

Salary sacrifice schemes can be an effective way for employers to offer benefits to employees while managing costs. However, understanding the VAT implications is crucial to ensure compliance with HMRC regulations.

This article provides an up-to-date overview of VAT rules for salary sacrifice schemes, incorporating the latest HMRC guidance.

Understanding VAT on salary sacrifice schemes

Salary sacrifice can be very tax efficient. It involves an employee agreeing to reduce their gross salary in exchange for a non-cash benefit. While this can provide tax advantages – especially for higher rate taxpayers – it also has VAT implications that employers should be aware of.

VAT treatment of salary sacrifice benefits

VAT is due on certain taxable benefits where applicable. When an employee sacrifices part of their salary for a benefit that would normally attract VAT (e.g. for bicycles, retail vouchers), the employer must account for VAT on the amount sacrificed.

There are two aspects to this:
– Input VAT recovery: Employers can recover input VAT on the cost of providing the benefit, but they must charge output VAT on the salary sacrificed.
– Higher benefit costs: If the cost of the benefit exceeds the salary sacrificed, VAT is calculated based on the higher amount.

4 key considerations for employers

Impact on employee costs
Certain benefits, such as the Cycle to Work Scheme, may become more expensive for employees due to VAT charges. Employers should assess whether they will absorb the extra VAT cost or pass it on to their employees.

Employer-provided goods and services
If an employer offers discounted goods or services (e.g., subsidised holidays or clothing) in exchange for salary sacrifice, VAT is due on the value of the benefit rather than the salary sacrificed.

Complex cases: car parking costs
VAT treatment for salary sacrifice car parking schemes varies depending on the nature of the service. Employers should seek specialist advice to ensure compliance.

Exempt benefits
Some benefits available through salary sacrifice remain VAT-exempt, including:
– Childcare vouchers (typically provided via salary sacrifice)
– Travel and subsistence expenses that are reimbursed by employers.

Staying compliant with HMRC guidance
HMRC has provided updated guidance on VAT treatment for salary sacrifice schemes, reinforcing the need for businesses to correctly account for VAT on taxable benefits. Employers should regularly review their schemes and seek professional advice where necessary.

For further details, refer to HMRC’s official guidance on salary sacrifice VAT rules https://www.gov.uk/hmrc-internal-manuals/vat-supply-and-consideration/vatsc05880

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