VAT On Employee Benefits
So many things in VAT seem to go around in circles. This article we are going to discuss VAT On Employee Benefits. The same issues arise, but different results are achieved.
How many times have we seen the same problems surfacing time and again with raising capital, grouping, cars, holding companies, mixed supplies and private use? The interpretations given may be different, or seem different, but the questions remain essentially the same.
Does this mean that you can never give a wrong answer in VAT as eventually, if your current interpretation is not accepted, your interpretation will later be accepted as the gospel truth? Or does it mean that advisors and HMRC will keep badgering away at a topic until they get the result they want? Salary sacrifice arrangements and VAT were attracting a lot of attention well over 20 years ago.
HMRC wanted to apply VAT to the provision of benefits where there was a salary sacrifice for the benefit provided. Eventually a VAT Tribunal decided the case Co-operative Insurance Society  (VTD 109) and this appeared to settle the matter. Where an employee negotiated their salary to include certain services (use of a car, or a better car than they were entitled to under the employer’s car scheme rules, was a common benefit at the time) but then received a reduced salary (a salary sacrifice) the Tribunal held that this was part of their employment contract and no VAT was due on the value of the service supplied.
Nineteen years later this has changed following the decision in Astra Zeneca UK Ltd (ECJ C-40/09). It now transpires that HMRC were right all the time and that where there is a salary sacrifice for goods or services, the salary foregone is consideration for the supply of the goods or services from the employer. At least they are right until it all changes again; until that time there is the transition to deal with.
HMRC has always maintained a distinction between a salary sacrifice arrangement and deductions from salary. For an arrangement to benefit from the VAT-free treatment there had to be a change in contract to reflect the reduced salary paid and the benefit received. If the same benefit was provided and there was no contractual right to the benefit, but a deduction was made from the salary, then VAT was due on the amount of cash the employer received. Following the Astra Zeneca decision and HMRC’s new interpretation there is no difference in VAT accounting between a salary sacrifice and a salary deduction.
The Astra Zeneca decision and HMRC’s reaction to it does not change the VAT accounting arrangements in a number of instances where an employee receives a benefit. For example, where an employer provides a benefit (meals, gym, transport home after late night working) for which no charge is made to the employee (either a direct charge, deduction form salary or through a salary sacrifice arrangement) then there will be no VAT on the benefit received where the benefit is available to all employees.
Where these benefits are restricted to a certain category of employee (such as directors) then VAT will be due on the provision of the goods or services. This does not mean that all employees have to actually receive the benefit, but it must be available to them. Thus, everybody does not have to get sweaty in the gym, but all employees must have the opportunity to use the gym. This may appear to create a problem where the employer operates from many sites, but the gym is only at one location (for example, head office). It is not believed that this will be a problem as long as all employees can, in theory, use the gym even if in practice it is impracticable for them to do so.
The employer can reclaim all the VAT incurred in providing these benefits as they are seen as general business overheads whether or not VAT is charged on the provision of the goods or services. In addition, there will be no VAT on benefits that do not attract VAT. For example, bus transport provided to and from an out-of-town head office will not be subject to VAT, as passenger transport is zero-rated. Similarly, other zero-rated benefits (books, certain safety equipment) will also be VAT-free as they are zero-rated. Exempt supplies will also not be subject to a VAT charge, so no VAT is due on the provision of child-care vouchers. Although no VAT is charged there is the possibility that the provision of the exempt benefit may impact upon an organization’s partial exemption position.
Furthermore, what had always been the vexed issue of providing cars to employees (or allowing them to upgrade their vehicle through a salary sacrifice) escapes a VAT charge. HMRC currently say that as the employer cannot reclaim the VAT incurred on a car that is purchased (and only 50% on a lease car) then no VAT is due on any consideration received by the employer from the employee (whether direct or through a salary sacrifice). That is, until somebody decides that what is being provided is not a car but the opportunity to receive something else other than the standard car provided under the employer’s car scheme? As it is not a car that is being provided it (whatever ‘it’ is) would be subject to VAT, and this would really close the circle with the earlier Co-operative Insurance Society decision.
New VAT charges
VAT charges will apply where any benefit, which is taxable, is provided through a flexible salary package or salary sacrifice (and direct payments or salary deductions by the employee will continue to be subject to VAT). This would include items listed above that are treated as not being subject to VAT where they are provided without charge. For example, a taxable gym membership or meal costs that are paid for through a salary sacrifice will be subject to VAT. Any other benefits, such as retail vouchers, holidays or anything else will also be subject to VAT (where the benefit is a taxable benefit). Input tax incurred in providing the benefit is deductible subject to the normal rules. Where these benefits have been provided in the past without VAT being charged under a salary sacrifice scheme, VAT will now be due on all benefits provided from 31 December 2011.
Where it can be shown that an agreement exists for the provision of a benefit under a salary sacrifice scheme and the agreement was made prior to 28 July 2011, HMRC will permit the amount of salary sacrificed to be VAT-free after 31 December 2011 until: any fixed-term agreement ends or the specified number of salary sacrifice payments are completed; ?the date of an employee’s annual salary/benefits review (the concession no longer applies even where the employee receives the same benefits as before); ?the date of any change in the provision of benefits under the salary sacrifice agreement, or ?the date of any change in an employment
Contract. Subsequent to any of these events, VAT becomes due on taxable benefits provided after 31 December 2011. Thus, HMRC will undoubtedly expect that all salary sacrifice arrangements will be subject to VAT at some point during 2012 as most salaries would normally be reviewed during the year. It is suggested that HMRC will expect that the agreement will be a written employment contract or variation that has been signed before 28 July 2011.
It seems as if the position of VAT and salary sacrifices is now settled, until the next change! It would appear sensible that anything provided for consideration, even under an employment package, is subject to VAT. Even so, there remains some scope for planning. Benefits available to all for no charge are not subject to VAT and the associated input tax can be reclaimed subject to the normal rules. It remains to be seen how far businesses wish to take this. After all, not long ago few businesses would have provided workplace gyms, so who knows what may be commonplace in the future. In addition, any tools of business (mobile phones, PDAs, iPads, laptops, computers etc) can be provided without a VAT cost, although employers have to ensure that any private use is restricted (a VAT charge arises on the private use element, but if private use is not permitted and is, in reality, minimal, no VAT charge usually arises). Finally, it seems as if the provision of cars is free of VAT due to the input tax restriction on acquiring the vehicles. In each of these instances, it is, of course, necessary to consider the direct tax implications.