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Salary Sacrifice Schemes - Change in VAT Rules

Currently, H M Revenue and Customs accepts that where an employee forgoes a part of their salary in return for any goods or services, there is no supply for VAT purposes and no VAT to bring to account, with related input VAT normally deductible.

However, from the 1 January 2012, and following a decision in the European Court, this is to change. Most salary sacrifice schemes will be seen as a supply for VAT purposes and where taxable goods or services are provided to an employee, VAT will be due. This will affect the Cycle to Work Scheme, provision of vouchers and potentially the provision of catering, amongst other arrangements. Revenue and Customs Brief 28/11 has further information.

As a concession HM Revenue and Customs has recently announced (in Revenue and Customs Brief 36/11) that if a salary sacrifice arrangement was already in place prior to the 27 July 2011 and extends beyond the 31 December 2011, then the amount of salary foregone may escape a VAT charge until any current arrangement with the employee expires or is reviewed or renegotiated. The Brief should be consulted for full details".

Businesses involved in salary sacrifice schemes should refer to Revenue and Customs Briefs 28/11 and 36/11 for full details. The Briefs can be found on the HMRC website at www.hmrc.gov.uk. For further advice and information, contact David Pegg our VAT Partner and Specialist Adviser on 01392 288 555 or by email at david.pegg@thomaswestcott.co.uk.