The End of Salary Sacrifice Schemes?

An important decision by the European Court of Justice in AstraZeneca UK Limited v HMRC (Case C-40/09) means that benefits provided under certain salary sacrifice schemes are subject to VAT when supplied to employees.  This could have significant ramifications for UK businesses, both in terms of potential historic tax liabilities and in terms of the financial viability of salary sacrifice schemes going forward.

AstraZeneca operated a scheme whereby its employees could sacrifice part of their salary for £10 vouchers to be used in various stores.  The value of the vouchers was deducted from the employees' pre-tax salary, thereby saving employees between 45p and 75p on each voucher.  From AstraZeneca's perspective, the vouchers were a relatively cheap benefit to provide because, while the company paid VAT when it purchased the vouchers from the scheme provider (input tax), it sought to reclaim the VAT from HMRC as a business overhead (input tax credit).  No VAT was paid on the supply of vouchers to the employees (output tax). 

However, the ECJ has decided that output VAT is in fact payable on the supply of vouchers to employees, because the vouchers are a "supply of services for consideration";  the services are the vouchers and the consideration is the salary which the employees sacrifice.

It remains to be seen how this will impact salary sacrifice schemes in future.  The first step will be to see whether HMRC decides that employers must pay arrears of output tax or whether it simply decides that employers must account for output tax going forward.  In any event, employers are likely to need to weigh up whether or not salary sacrifice schemes of this type are still a viable benefit.