VAT and childcare vouchers – where do I stand?

Following the well-publicised Astra Zeneca case that went through the European Court of Justice in July 2010, HMRC issued guidance on how VAT should be applied to salary sacrifice schemes.

We covered the ruling and HMRC’s initial guidance in our blog post ‘ECJ Ruling does not apply to childcare vouchers’ on 11 August 2010.

HMRC issued further information in 2011 which expanded on the initial guidance and stated that new VAT treatment must be taken into account from 1st January 2012 – you can read the full guidance notes here.

No doubt you have sought the proper advice in the run up to this deadline and are clear on your requirements but as there has been considerable commentary on how childcare vouchers are affected by this ruling I wanted to be clear on what the guidance is and who you can contact for help.

Section 4.3 of the HMRC’s guidance relates to childcare vouchers and states that:

“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 2012.”

Source: HMRC Revenue & Customs Brief 28/11

It is worth stressing, as the guidance states, that VAT may not be fully recoverable, suggesting that a portion of it may still be recovered and that this change will not affect all employers offering a scheme. If you’re in any way unsure of how this will affect you then we’d urge you to contact HMRC for clarification.

This ruling does not affect parents; they will continue to receive childcare vouchers as before.