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Salary sacrifice schemes face price hike after VAT ruling

European Court of Justice imposes tax on schemes

man on bike and kids

VAT will now be charged on salary sacrificed in exchange for certain items, including bikes

HMRC has announced changes to the VAT treatment of salary sacrifice schemes from 1 January 2012, which could increase their overall cost.

Salary sacrifice enables you to exchange part of your salary for a non-cash benefit. Traditionally used for pension contributions, you can now also give up salary in return for benefits such as bikes, childcare vouchers, high street shopping vouchers, mobile phones and, in certain areas, bus passes. The new ruling means some of these items will now incur a VAT liability.

What’s behind the salary sacrifice VAT change?

The decision comes as a result of a European Court of Justice (ECJ) ruling in a case regarding pharmaceutical giant Astra Zeneca and the high-street shopping vouchers it provided to employees. The ECJ ruled that the giving of vouchers was a supply of services in return for payment. This meant that Astra Zeneca was able to reclaim VAT it had paid on the vouchers, but therefore that VAT was due on the salary sacrificed by its employees.

Which items are affected by the VAT ruling?

Salary sacrifice arrangements often include cycle-to-work schemes, childcare vouchers and high-street vouchers. Salary sacrificed in exchange for items that are liable to VAT, including bikes and high-street vouchers, will now itself be liable to VAT.

As childcare is exempt from VAT, the supply of childcare vouchers and other VAT-exempt benefits will not be directly affected, although VAT may be payable on related costs.

When do the new VAT rules come in?

Until 31 December 2011, no VAT will be payable on salary sacrificed, other than that used to buy high street vouchers, so VAT won’t be payable by the employee. From 1 January 2012, however, the terms of the ECJ ruling will apply and VAT, where appropriate, will be payable.

  • For more details on how the scheme works, read our guide to Salary sacrifice.
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