HM Revenue and Customs Brief 28/11
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Issued 28 July 2011
VAT: Changes to the treatment of certain supplies made by
employers under salary sacrifice arrangements following the CJEU
Judgment in Case C-40/09
Astra Zeneca operated a flexible remuneration package scheme
under which employees could opt to take part of their remuneration in
the form of goods and/or services rather than as salary. The case
before the Court of Justice of the European Union (CJEU) concerned the
correct VAT treatment of high street shopping vouchers provided to
employees as one of the options of the scheme.
The Court found that the provision of vouchers amounted to a
supply of services effected for consideration. As a consequence, whilst
Astra Zeneca was able to recover VAT incurred on acquiring the
vouchers, output tax was due on the consideration received from its
Although this case was concerned with the supply of vouchers
to employees, the principles considered by the Court are of general
application and will apply to other supplies of goods and services to
1.2 The UK position on the provision of goods and services
via salary sacrifice or deductions from salary
Following earlier decisions by the UK courts, HM Revenue
& Customs' (HMRC) policy was to make a distinction between the
VAT treatment of supplies of goods and services to employees by a
deduction from salary, and those provided under a salary sacrifice
1.2.1 Deduction from salary
This occurs where an amount is deducted from an employee’s pay
in return for a supply of goods or services by the employer. Output tax
has always been and continues to be due on the amount deducted from
salary. Input tax is recoverable in accordance with the normal rules.
1.2.2 Salary sacrifice
For VAT purposes 'salary sacrifice' has a very narrow and
specific meaning. It describes an arrangement such as in the
Co-operative Insurance Society case  (VTD 109) where an employee
opts to receive services and forgoes part of their salary in return.
The employee enters into a new employment contract or has their
existing contract amended to reflect the new arrangement which they are
In relation to such schemes HMRC have, to date, accepted that
the reduction in the salary did not constitute consideration for the
benefits received and output tax was not due. Employers were able to
recover the related VAT as input tax, subject to the normal rules.
In cases where the employee has been provided with the use of
a good (for example a home computer) and opts to purchase it at the end
of the scheme it has always been HMRC’s view that VAT is due (where
applicable) at that stage.
1.3 The Judgment of the CJEU
The Court considered whether the provision of the vouchers was
a supply for a consideration. It found that there was a direct link
between the provision of the retail vouchers by the company to its
employees and the part of the cash remuneration which the employees
As far as arrangements involving deductions from salaries are
concerned, the judgment supports HMRC’s existing policy that these are
consideration for a supply for VAT purposes.
However, HMRC considers that the rationale used by the CJEU
goes wider than deductions from salary, and as a consequence of this
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.
It is clear that the principles applied by the CJEU are not
confined to vouchers, but are equally applicable to many other
situations where employers offer benefits to their staff. Where the
benefit is subject to VAT, output tax will be due from, and input VAT
recoverable by the employer in accordance with the normal rules.
1.4 Implementation: Revised VAT treatment of salary sacrifice
Businesses providing benefits under arrangements, which
qualify as salary sacrifice schemes for VAT purposes, must account for
output VAT on these supplies, where they are subject to VAT. In order
to allow businesses time to make the necessary adjustments, HMRC will
not require output tax to be accounted for on taxable benefits provided
under salary sacrifice schemes, until 1 January 2012.
See the annex for details of how this change of practice will
apply in particular circumstances.
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 (for example where employers supply the benefits at below what it
cost to buy them in), the value should be based on the cost to the
3. Direct Tax
HMRC considers that the judgement is limited to the
application of VAT legislation. The principle derived from the CJEU
decision is concerned with whether, in the context of the provision of
a benefit by an employer to an employee as part of the remuneration,
that constitutes a supply of services affected for consideration. There
is no comparable concept within tax law applicable to the taxation of
employment income and HMRC will not be amending the existing published
guidance relating to employment income issues.
Where you are in any doubt about the correct VAT treatment
please contact the VAT Helpline on Tel 0845 010 9000.
4. Effect of the CJEU judgment in particular circumstances
4.1 Cycle to Work Scheme
Under the Cycle to Work Scheme employers purchase bicycles and
safety equipment and provide them to employees. Where this has been
done under a salary sacrifice arrangement, the effect of the judgment
is that employers must account for output tax based on the value of the
salary foregone by the employee in exchange for the hire or loan of a
Affected businesses should apply this treatment from 1 January
2012. Employers can continue to recover VAT on the purchase of the
bicycle and associated equipment.
Employers who have provided bicycles under deduction from
salary arrangements are unaffected by the judgment as payments received
from employees have always been subject to VAT and will continue to be
VAT remains due when a bicycle is disposed of and its value
should normally be based on the price of an identical or similar item,
taking into account the age and condition etc.
We are aware that valuing bicycles has caused difficulties for
Scheme operators and therefore, to reduce administration burdens, the
used to value bicycles for direct tax purposes may be used.
This table provides valuations for bicycles based on the age and
original price. Any bicycles that fall outside of the table (such as
antique or specialist bicycles) should be valued using the normal VAT
valuation rules. If businesses choose to use lower values, they may be
challenged in which case evidence will be required to support the
4.2 Face Value Vouchers
HMRC’s published policy in relation to the provision of face
value vouchers by employers to employees aligns with the judgment of
the CJEU. In the case of supplies made under a deduction from salary
arrangement input tax is recoverable but output tax must be declared.
Where such vouchers have previously been provided under a salary
sacrifice arrangement (as defined above) then input tax was claimable,
subject to the normal rules, but output tax was due to the extent of
the input tax claimed.
4.3 Childcare vouchers
Childcare vouchers are not directly affected by the judgment
as they are not subject to VAT.
However, employers that incur administrative fees from their
voucher provider have, to date, been permitted to recover VAT on those
fees as a general business overhead. However, because the fees are
directly attributable to the exempt supply of vouchers the normal
partial exemption rules must be applied with the result that the VAT
incurred may no longer be fully recoverable.
Affected businesses should apply this treatment from 1 January
4.4 Food and catering provided by employers
Employers may provide their staff with free or subsidised
meals, snacks or drinks. Where employees pay for the meal etc, the
normal VAT liability will apply.
If employees make no payment, VAT is not due (provided the
benefit is available to all staff).
The judgment does not affect the VAT treatment where employees
pay for their meals etc by a deduction from salary as VAT remains due.
However, from 1 January 2012 where employees pay for meals etc
under a salary sacrifice arrangement, employers must account for VAT on
the value of the supplies unless they are zero-rated. Subject to the
normal rules, the employer can continue to recover the VAT incurred on
HMRC are aware, that historically some employers have set up
what they purport to be salary sacrifice arrangements to avoid VAT that
is due on the consideration provided by employees for their meals, for
example using electronic payments cards which record the value of
consideration that is available to purchase meals. HMRC will continue
to challenge such arrangements.
4.5 Benefits provided to all employees for no deduction or
reduction from salary
The judgment only applies where an employee provides
consideration in exchange for benefits. Where an employer provides, for
example, a workplace gym which all employees may use for no deduction
or reduction from their salary that will not fall within the scope of
the judgment. Businesses may continue to recover VAT incurred on
providing such facilities as a business overhead subject to the normal
Separate charges to use facilities etc remain within the scope
4.6 Motor cars
Most businesses are prevented from recovering VAT in full on
the purchase and leasing of company motor cars. The input tax block on
cars (100 per cent on purchases and 50 per cent on leasing) means that
employers do not account for output tax when cars are made available to
employees. Where VAT recovery is restricted and output VAT is not due
the judgment has no direct impact.
Where an employer suffers no input tax restriction, output tax
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Article Published/Sorted/Amended on Scopulus 2011-07-28 16:18:55 in Tax Articles