News

By Diana Bruce
Policy Liaison Officer for the Institute of Payroll Professionals

Salary Sacrifice Retail Vouchers

A recent ruling by the European Court of Justice (ECJ) has roused concern amongst employers.  The judgment stated that employers must account for output tax on the supply of salary sacrifice retail vouchers to employees.  It is believed that, although many employers recover VAT charged to them when they buy retail vouchers, there are likely to be a number of those that do not account for output tax on the provision of the retail voucher to the employee.  Now that the ECJ has followed the Advocate General's opinion, which was delivered in April, it is likely that HM Revenue & Customs (HMRC) will begin to assess employers for the output tax due. 

This judgement confirms fears that it is likely to cost some employers who operate salary sacrifice schemes a substantial amount of money as HMRC is entitled to assess employers for any output tax due over the last 4 years.  So this does leave us wondering if employers are going to be faced with retrospective VAT bills and are employees going to face a future with very limited salary sacrifice schemes as a result? 

It was the £10 retail voucher scheme operated by Astra Zeneca which led to the present case, Astra Zeneca UK v HMRC but also in particular 'cycle to work' schemes which allow employees to buy bikes at a substantial discount.

Astra Zeneca offers its employees a remuneration package which, as well as normal salary, includes selected benefits which employees can choose from a list. Each selected benefit gives rise to a deduction from the normal salary. Among those benefits, Astra Zeneca offers its employees retail vouchers to be used in certain shops, worth £10 each. This is advantageous to the employees as the deduction from salary for each £10 voucher is less than that amount (between £9.25 and £9.55 is deducted).

Astra Zeneca claimed reimbursement from HMRC of the input VAT which it incurred when buying the retail vouchers. HMRC rejected the claim, asserting that Astra Zeneca had to pay VAT in respect of retail vouchers it purchased if/when they were supplied to its employees as part of their remuneration packages (the employees, of course, are not taxable persons for the purpose of VAT).

The ECJ agreed with HMRC, holding that the provision of a retail voucher by a company to its employees as part of their remuneration constitutes a supply of services affected for consideration.

Specifically the ECJ ruled:

"Article 2(1) of the Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes - Common system of value added tax: uniform basis of assessment, as amended by Council Directive 95/7/EC of 10 April 1995, must be interpreted as meaning that the provision of a retail voucher by a company, which acquired that voucher at a price including value added tax, to its employees in exchange for their giving up part of their cash remuneration constitutes a supply of services effected for consideration within the meaning of that provision".

UK Gift Card & Voucher Association

The director-general from the UK Gift Card & Voucher Association has published a statement on the aforementioned judgement as he is of the opinion that employer fears are exaggerated.

"Recent press coverage of the AstraZeneca judgement on VAT charges for retail vouchers as part of salary sacrifice schemes dramatically exaggerate the implications for UK business. Where certain tax advisors have predicted huge costs to businesses resulting from this change in interpretation of the policy, their speculative and inflated figures bear no relation to the actual implication. As a result, there are some fundamental issues that need clarification.
 
First, the UK HMRC has yet to issue a policy statement in relation to the European judgment that AstraZeneca must account for VAT when passing on retail vouchers to staff in salary sacrifice schemes.
 
Secondly, salary sacrifice in relation to retail vouchers accounts for less than three per cent of the UK's £4billion voucher industry. The VAT on this three per cent, therefore, equals less than £21 million annually for the whole industry.
 
Finally, moving forward, the ultimate effect is that the cost on this is, in fact, neutralised at zero if the price paid for the voucher by the employee is the same as that paid by the employer because the judgement rules that companies running salary sacrifice schemes for retail vouchers have to account for VAT on the supply to the employee but, at the same time, are able to recover the VAT on the purchase."

Cycle to Work Scheme - simplified valuation guidance published by HMRC

On a final note, staying with salary sacrifice, the IPP Policy team have been working with HMRC via the expenses and benefits forum for many years.  During this time the IPP and others have asked for guidance on how to value an asset in respect of the cycle to work schemes. We are pleased to announce that after consultation with the IPP and other representative bodies, HMRC have now updated the Employment Income Manual to include details of an optional simplified approach to valuing cycles when sold to an employee after the end of a loan or salary sacrifice period.  

If a cycle is transferred to an employee at a nominal value (say 5 to 10% of the original retail price), then if the market value is higher, the employee will be taxable on the difference.  Below are details of an optional simplified approach with a more realistic valuation for cycles.  See EIM21667a for details of how to use the table.

The valuation table