Insights

If you make deductions from employee wage packets did you know that in some instances VAT is payable on those deductions? Additionally, there are important changes to the VAT payable on salary-sacrifice schemes, which come into force on 1 January 2012.

AstraZeneca decision

HMRC announced these policy changes following a case brought to the European Court of Justice (ECJ) by pharmaceutical behemoth AstraZeneca, which offered employees shopping vouchers with major retailers as part of a flexible remuneration package.

In the AstraZeneca case, the ECJ ruled that AstraZeneca should have accounted for VAT on the vouchers bought by staff through its salary sacrifice scheme.

Prior to this, HMRC made a distinction between amounts deducted from salary and salary sacrifice schemes. HMRC took the view that provided conditions were met,  salary given up in exchange for goods or services did not necessarily constitute a VATable  supply.

However, following this decision, HMRC has said that there is no justification for a distinction between salary deductions and salary sacrifice.

What it means for employers

This new policy means that amounts given up under salary sacrifice schemes are to be treated as payments for a supply by the employer to the employee, eliminating the distinction between a salary deduction (which has always had VAT implications because it is treated as payment for a supply) and a salary sacrifice.

In effect this means that companies will have to pay VAT on non-cash goods and services provided to employees in exchange for some of their salary. Although childcare vouchers will not be subject to VAT, employers that use an agency to run their salary sacrifice scheme will have to pay VAT on the 'administration fee' and it can only be recovered in accordance with the partial exemption rules as the supply is directly attributable to the exempt supply of childcare vouchers. This may mean that not all the VAT on voucher administration fees is recoverable.

Other salary sacrifice schemes

Meanwhile, if you run a cycle to work scheme where bikes or cycling safety equipment is made available under a salary sacrifice arrangements, from 1^st January 2012, you must account for output VAT on salary foregone by the employee in exchange for the loan or hire of the bike or equipment. Employers can continue to recover input VAT on the purchase of the bikes and equipment. VAT also remains due when the bike is disposed of.

Finally, don't forget that the tax exemption for workplace meals no longer applies to meals provided under a salary sacrifice arrangement.

Read the most recent guidance from HMRC about these VAT changes.

Changes to VAT on low value goods

In other VAT news, from 1 April 2012, Low Value Consignment Relief (LVCR) will no longer apply to goods sent from the Channel Island to the UK. This move from the government is a way to stop retailers from avoiding VAT on low value goods by procuring such goods from the Channel Islands.

This loophole was most frequently exploited by online retailers selling CDs and DVDs and the loophole was costing the government many millions of pounds a year. The government's intention to take action to end the exploitation of LVCR was confirmed in the Chancellor’s Autumn Statement 2011 with the reduction in the threshold for LVCR, below which items are imported free of VAT, from £18 to £15, which remains in effect between 1 November and 1 April.

If you are unsure about any aspect of VAT please contact us directly by emailing Simon Paterson at sp@rjp.co.uk.