VAT due on employee benefits from January

It's taken over a year for the Taxman to decide what to do following the EU ruling regarding VAT on certain employee benefits. He's now issued guidance. What does this say and how should you implement the change?

The VAT sting in the tail

A few years ago the pharmaceutical giant Astra Zeneca (AZ) glot into a dispute with the Taxman over a VAT repayment claim relating to the cost of providing benefits-in-kind (BiKs) to some of its staff. This dispute went all the way to the Eurpoean Court of Justice (ECJ). Last year the ECJ confirmed AZ's rights to reclaim the VAT, but this good news came with a sting in the tail. AZ would have to charge VAT on the value of certain BiKs it gave its staff. This ruling has led to a change to the UK VAT rules for all businesses.

Sacrificing pay was not a supply

Subject to the usual rules, a business can reclaim VAT on the cost of employing staff. This includes providing employees with BiKs such as free food or goods. But the position becomes tricky where an employee gives up some of their pay in exchange for these BiKs. This is knows as a "salary sacrifice" and the incentive is usually that an employee will gain more value from it that thr equivalent salary they give up. The Taxman's long standing view was that salary sacrifice was outside the scope of VAT. This meant VAT paid on the cost of providing BiKs couldn't be reclaimed and neither was it due on the supply of these to employees. The ECJ ruled that the Taxman's view was wrong.

New Rules

The Taxman recently issued guidance to say that from January 1 2012 where you provide BiKs to your staff as part of a salary sacrifice scheme, you must account for VAT on the value of the pay they give up. On the plus side you can reclaim the VAT you pay on the cost of providing these.

Example

Acom Ltd offers its employees a salary sacrifice option. They can exchange some of their pay for discount vouchers which can be used in local shops. This is attractive to employees because the discounts they recieve make the vouchers worth more than the salary they lose. An employee giving up £600 of pay will recieve vouchers to buy goods worth £700. It costs Acom £550 plus 20% VAT (£110) to purchase the vouchers. From January 1 2012 Acom can reclaim this but it must account for 20% VAT on the £600, ie. £120, it has effectively recieved from the employee. The new rules mean that Acom is worse off by £10 (£120-£110) for each employee using the salary sacrifice scheme.

VAT not due in every case

Not all salary sacrifice arrangements result in a VAT charge. In our example the BiK Acom provides - retail vouchers- is subject to VAT, but if the BiK supplies is VAT-exempt, e.g. a contribution to an employee's pension fund, no VAT is payable.

Summary

From January 1 2012 you must account for VAT on the value of salary given up by your staff in exchange for certain benefits you provide them. Some benefits won't be subject to this charge; check our list for details. This good news is that you will also be able to reclaim the VAT of the cost of providing these benefits.

If you would like any more information or advice about VAT, don't hesitate to give us a call on 0191 386 4786

VAT due on employee benefits from January

Summary

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