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VAT and salary sacrifice arrangements

Napthens - September 16th 2010

In the case of Astra Zeneca UK -v- HMRC the European Court of Justice has ruled that the majority of salary sacrifice schemes offered by employers attract VAT.

In this case, the employer, Astra Zeneca offered its employees numerous benefits which an employee would chose in advance from a list. The selected benefit would give rise to a specific deduction from the employee’s salary. Amongst the benefits, Astra Zeneca offered retail vouchers to be used at certain well-known retailers. What made the arrangement worthwhile was that the vouchers had a value of £10 however the amount deducted from the employees salary was between £9.25 and £9.55.

Zeneca claimed reimbursement of the VAT on purchasing the vouchers from HMRC, on the basis that they constituted a business purchase, however argued that they did not have to account for the VAT on supplying the vouchers to their employees. HMRC rejected the claim on the basis that the vouchers were part of an employee’s remuneration package and used for purposes other than business purposes. The ECJ agreed with HMRC and ruled that the arrangement constituted a supply of services.

Employers will therefore need to review their salary sacrifice and benefits arrangements as the ruling may mean increased operating cost for offering retail vouchers as part of a benefits package and it may ultimately affect the viability of operating such a scheme. However many forms of benefits will be unaffected because the service is exempt or outside the scope of VAT, for example pension contributions or childcare vouchers.