New rules explained: VAT advice for salary sacrifice schemes

At the start of 2012 the rules concerning whether VAT should be payable on some types of salary sacrifice schemes were clarified and it is important to get correct VAT advice on this matter.  This arose because of a case which found it was incorrect to make a distinction between on the one hand salary sacrifice (non VAT-able prior to Jan 2012) and on the other, deductions from wages which were VAT-able depending on what the deductions are. A number of clients have asked us questions about this recently and so we thought it important to explain what the latest arrangements are for employers and how they might impact their staff.

As of January 1^st 2012, VAT may be payable on some benefits provided to employees through a salary sacrifice scheme. These are typically for expenses for which VAT would normally be payable, such as bicycles or goods for which VAT would added, like the retail vouchers. The way that VAT is calculated in these circumstances is as follows: input VAT is recoverable but output VAT is due on the amount of salary sacrificed. If the cost of the benefit is more than the original amount of salary sacrificed, the output VAT charge will be based on the higher amount.

One outcome of this change is that it will make certain benefits, such as bikes obtained through the Cycle to Work Scheme, more expensive for employees.  In fact the net effect of the addition of VAT means the scheme can cost employees up to a third more than it would have done before January 2012.

Another area likely to have a wide impact is where employers provide their own goods or services to their staff in return for a salary sacrifice, for instance, offering heavily discounted holidays or clothing. In these circumstances, HMRC will evaluate whether the level of pay sacrificed is less than the value of the benefit. If it is, then VAT will be due on the value of the benefit itself.

Car parking is perhaps the most complex benefit to be affected by this change. Depending on the type of service provided, you may or may not have to pay additional VAT. It is best to discuss this individually with one of our VAT specialists to ensure the advice is pertinent to your own situation.

Any benefits provided to employees free of charge and outside of a salary sacrifice scheme are not affected by the changes introduced this year.  Also excluded are childcare vouchers (which are usually paid for by salary sacrifice). It is important to note that there is a potential specific issue for partly exempt businesses if they use firms to administer their childcare voucher schemes, please ask us if you think this may apply to your business.

Expenses re-claimed such as travel and subsistence arrangements have also remained non VAT-able.

Salary Sacrifice VAT Compliance – a 4 point action plan

1. Review existing benefits offered to employees and decide if VAT is payable
2. Agree on an internal policy concerning whether you as the employer are prepared to meet the extra cost or whether it is passed onto the employee
3. Redesign salary sacrifice scheme rules in line with your internal policy
4. Ensure VAT is correctly accounted for going forward

Should any of the circumstances described above impact you or your staff, RJP is currently offering its clients the opportunity to take advantage of a special VAT health check.

Please contact Simon Paterson if you would like to find out more information by emailing sp@rjp.co.uk.