Major blow for salary sacrifice and flexible benefit schemes

Today’s decision by the European Court of Justice (ECJ) in the Astra Zeneca case could lead to significant VAT costs for employers who operate, or intend to implement, salary sacrifice schemes and could mean fundamental changes to the way they are run, says RSM Tenon.

Historically, HMRC policy has been that where benefits are provided to employees under a salary sacrifice arrangement, the amount of salary sacrificed is not subject to VAT. However, the ECJ has ruled that the salary sacrificed is consideration for a supply by the employer to the employee and potentially liable to VAT, depending on the benefit provided. While the case is in respect of retail vouchers Astra Zeneca provides to its employees as part of their flexible benefits package, the decision will affect other types of benefit provided under such schemes including:

• Workplace parking

• Green Cars

• Cycles

• Workplace nurseries 

• Mobile phones

Bus schemes will not be affected because they are zero rated for VAT purposes.

Some commentators are suggesting that employers might also be liable for historic VAT costs. It remains to be seen how HMRC will react to the decision, however, given HMRC’s policy in this area to date, it will come as something of a surprise if it seeks to raise assessments in respect of past periods.

Action required by employers:

• review existing salary sacrifice and flexible benefit schemes to assess if the benefits provided are subject to VAT
• ensure that any proposed schemes are planned to take account of the potential additional VAT costs 
• consider if you will bear the full burden of the additional VAT cost or ask employees to bear all or some of the cost?
• note that any increased salary deductions will require changes to employment contracts and will have tax consequences
• consider changing the benefits available to mitigate the VAT cost.