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Chartered Accountants and Professional Business Advisers

Salary Sacrifice Arrangements

HM Revenue & Customs has announced that a change of policy relating to the VAT treatment of salary sacrifice arrangements will be brought into effect from 1 January 2012.

Background

At the moment it is HM Revenue & Customs policy to regard a salary sacrifice arrangement as not being payment for any goods or services and as such not subject to VAT.

Salary deductions, on the other hand, have always been regarded as being a payment for goods or services and in consequence attract VAT at the appropriate rate depending on what it is that is being supplied.

New Policy

Following a European Court case involving Astra Zeneca HM Revenue & Customs now believes that both salary sacrifice and salary deduction arrangements should take the same VAT treatment i.e. both arrangements should be treated as involving a supply of goods or services.

VAT Treatment

This means that employers will be obliged to account for VAT at the appropriate rate once the new policy takes effect in respect of all salary sacrifice and salary deduction arrangements.

The rate of VAT to apply will depend on the nature of the goods or services being supplied.  For example, childcare vouchers will be exempt from VAT, cycle to work schemes will be subject to VAT at the full 20% rate, and so on.

No information has been provided by HM Revenue & Customs regarding the VAT treatment of salary sacrifice arrangements relating to pension contributions.  It is likely that most of these will not give rise to a VAT charge but we recommend taking further advice.

Input VAT

Where the employer is supplying goods or services that are exempt from VAT it will be necessary to factor that in when preparing the VAT return figures as the business will be partly exempt and, as a result, the employer may no longer be entitled to full input VAT recovery.  Employers supplying goods or services that are subject to VAT should be able to recover input VAT as normal.

Implementation Date

As noted above the new policy takes effect from 1 January 2012.

Further information

HM Revenue & Customs has issued a Revenue & Customs Brief on the subject.  Further information is also available from your usual Shipleys contact, or from the VAT team.

Specific advice should be obtained before taking action, or refraining from taking action, on any of the subjects covered above.  If you would like advice or further information, please speak to your usual Shipleys contact.

Need more help? Please contact us at advice@shipleys.com or +44 (0)20 7312 0000