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Changes to Salary Sacrifice Arrangements

Many businesses will need to review their salary sacrifice arrangements following a recent CJEU (Court of Justice of European Union) case involving Astra Zeneca.

It has been confirmed that if an employee surrenders part of their salary on the basis their employer provides some other service in return, then this will shortly be a supply for VAT purposes from the employer to the employee.

This means that the employer will need to account for VAT on the value of the service. In the past, input tax was recoverable but no VAT payable.

This new understanding applies from 1 January 2012 to allow businesses to adjust to this situation and output tax will not be payable on such supplies until then.

The value will be based on the level of the sacrificed salary or if this is less than the cost to the employer then the cost will be the value.

As an example an employee who is a keen cyclist requests a bike costing £500 in exchange for £500 less salary. This would give an £83 VAT bill for the employer. The input VAT on providing the bike is recovered in the normal way.

Childcare vouchers and pension contributions are not affected by this change as they are exempt supplies for VAT purposes.

My thanks goes to John Shearer of Mayell Shearer VAT Consultants for providing the details on this, John’s website is here.

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