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Following the European Court of Justice decision in Astra Zeneca (UK) Ltd v CRC (Case C-40/09) [2010] STC 2298 concerning the supply of vouchers to employees, in which the court found that the provision of vouchers amounted to a supply of services for a consideration, Astra Zeneca was able to recover VAT incurred on acquiring vouchers but output tax was due on the consideration received from employees.
HMRC have explained that the principles considered by the court will apply to other supplies of goods and services to employees. As far as arrangements involving deductions from salaries are concerned, the Astra Zeneca judgment supports the Revenue's existing policy that these are consideration for a supply for VAT purposes.
However, the department considers that the rationale used by the court goes wider than deductions from salary, to the extent there is no longer a distinction between deductions from salary and a salary sacrifice.
Therefore, the amount of salary foregone is consideration for supplies of the benefits whether provided under a salary sacrifice or by a deduction from salary.
Businesses providing benefits under arrangements that qualify as salary sacrifice schemes for VAT purposes must therefore account for output tax on the supplies where they are subject to VAT. Firms have until 1 January 2012 to make the necessary adjustments.
In most cases, the value of the benefit for VAT purposes will be the same as the amount of salary deducted or the amount foregone under a salary sacrifice arrangement. Where this is less than the true value, the value should be based on the cost to the employer.
The taxman's explanation is covered in Revenue and Customs Brief 28/11, a section of which covers particular circumstances including the cycle-to-work scheme, childcare vouchers, cars, food and catering, and face-value vouchers.
