Q) We’ve heard there’s been an European Court of Justice (ECJ) case regarding VAT and salary sacrifice arrangements, what should I be aware of? A) Following the decision of the European case of Astra Zeneca, about a year ago, it was decided that salary sacrifices by employees, in exchange for retail vouchers provided by their employers, constituted consideration for a supply of services on which output tax was due. HMRC have now outlined how VAT applies in salary sacrifice arrangements in their Business Brief 28/11. Previously, goods and services provided under salary sacrifice arrangements were not seen as consideration for supplies and any related input tax was allowable under the normal rules. Output tax was only deemed payable on supplies of goods or services when deductions from salaries were made. HMRC have applied the rationale of Astra Zeneca to encompass a broader application; there is no longer a distinction between deductions from salary and salary sacrifice arrangements. Where the benefit is subject to VAT, output tax will be due and input tax recoverable by the employer subject to normal rules. Output tax due on salary sacrifice benefits is effective from 1st January 2012. Valuation is based on the salary foregone or the amount deducted from the salary. However, where this value is below the cost incurred by the employer, the cost price is the value on which VAT is due. Where benefits are provided to employees with no deduction or reduction to salaries, no output tax is due and input tax is recoverable subject to normal rules. For instance, if an employer provides a gym at the workplace available to all employees without any deductions or reductions from salaries made, the business is not liable to account for output tax and may recover any related input tax as a business overhead subject to the normal rules. Partial exemption comes into play where the benefit forms an exempt supply. For instance, child care vouchers provided to employees for a reduction or deduction from salaries are exempt and no output tax is due. However, where previously VAT on voucher provider fees were allowable as a general business overhead, with effect from 1st January 2012 input tax will relate to an exempt supply and recovery will be via the rules for partial exemption. The changes also impact on the Cycle to Work Scheme where employers purchase bicycles and safety equipment for employees under a salary sacrifice arrangement. With this scheme, employers are still able to recover input tax on the purchase of items but from 1st January 2012 they will have to account for output tax on the deemed supply. Where the arrangements are by salary deductions there is no change as output tax has always been due. VAT also remains due when a bicycle is disposed of. With regard to food and catering provided by employers, if free or subsidised meals are made available to all employees no VAT will be due. With effect from 1st January 2012 where employees pay for meals under a salary sacrifice arrangement employers must account for output tax unless zero rating applies. If you would like to discuss this further please e-mail us at firstname.lastname@example.org or call our Tax Advice Line on (01455) 852555.