Employers: Are you up to speed on salary sacrifice VAT changes?

It’s been nearly three months since VAT changes came into force affecting salary sacrifice schemes, so we thought we would put together a little refresher for employers on what the changes mean for childcare vouchers.

The changes

On 1 January 2012, changes to the way VAT is levied on salary sacrifice schemes came into force, bringing with them the potential to increase the overall costs of such schemes.

Salary sacrifice is a way for employees to exchange part of their salary for a non-cash benefit. Traditionally they have been used for pension contributions, but they can now also be used for benefits such as bikes, childcare vouchers, high street shopping vouchers, mobile phones and in certain areas even bus passes. The new rules mean that some of these items will now be liable to VAT.

What's behind the VAT change?

The changes have been made as a result of a European Court of Justice (ECJ) ruling in a case regarding Astra Zeneca and the high-street shopping vouchers it provided to employees under salary sacrifice arrangements. The ECJ ruled that the provision of shopping vouchers to staff as part of a salary sacrifice scheme was a supply of services in return for payment. This meant that Astra Zeneca was able to reclaim the VAT it had paid to acquire the vouchers, but the company also had to pass on to employees the cost of the vouchers including VAT.

So what now?

Following the changes, all salary sacrificed in exchange for benefits that are liable to VAT - including bikes and high-street vouchers - will now be liable to VAT.

What about childcare vouchers?

Computershare Voucher Services Limited (“CVS”) has obtained confirmation from HMRC that childcare vouchers provided by us are “credit vouchers” as defined by Sch 10A VATA 1994, as we never charge more than the face value for the voucher itself, the voucher is outside the scope of VAT.  As HMRC consider that the employer is an intermediary supplier of the voucher to employees, the same VAT liability rules will apply, although each employer should seek their own professional advice on this matter.

HMRC have also confirmed that the CVS service charge for the administration of the scheme is a separate standard rated supply.  As employers do not charge employees more than the face value of the voucher, then (depending on the employer’s circumstances), the VAT that CVS charge for the service charge, should be a deductible expense.  If, however, an employer starts to charge employees more than the face value for the vouchers, this position would change and employers should take their own professional advice.