Salary sacrifice schemes to attract VAT

Accountants should be aware that HMRC has now clarified its stance on salary sacrifice schemes.

Some employees sacrifice part of their salary in return for a benefit and in future employers will find that the portion sacrificed will attract VAT.

Last year in the European Court of Justice, it was determined that AstraZeneca had to pay VAT on the salary sacrifice employees made in return for receiving retail vouchers. The new ruling will affect employers that operate flexible benefit schemes, such as cycle to work.

As from the beginning of 2012, the salary sacrifice will be treated as a consideration for VAT, according to HMRC’s latest update. If the benefit is liable to VAT, input VAT will be recoverable but output VAT will have to be paid on the salary sacrifice. Furthermore, if the employee receives a benefit that is valued higher than the amount of the salary sacrifice, the higher figure will be subject to VAT.

Mark Groom, one of the tax partners at Deloitte, said employers will have to decide whether they, or their employees, will bear the cost of this change. If employers are not prepared to cover the cost, schemes will need to be reviewed and terms amended to cover the increased cost of VAT. Employees already enrolled in a salary sacrifice scheme may also find that their scheme is amended for the remainder of its term.

Although the government says it’s keen to cut down on the administrative burden small businesses have to face, this move sounds like the complete opposite and could cause some firms additional headaches.

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