The European Court of Justice (ECJ) has sounded the death knell for salary sacrifice schemes by agreeing with HMRC that the provision of a retail voucher by a company to its employees as part of their remuneration constitutes a supply of services effected for consideration.
The ECJ has ruled that (most) benefits provided to employees under salary sacrifice schemes are VAT-able. Salary sacrifice schemes are enormously popular, not only the £10 retail voucher scheme operated by Astra Zeneca, which led to the present case, but also in particular ‘cycle to work’ schemes which allow employees to buy bikes at a substantial discount. No doubt they will now wither, if not die.
Many employers offer their employees a remuneration package which, as well as normal salary, includes selected benefits which employees can choose from a list. Each selected benefit gives rise to a deduction from the normal salary. In Astra Zeneca’s case, its employees are offered retail vouchers to be used in certain shops, worth £10 each in the shops. This is advantageous to the employees as the deduction from salary for each £10 voucher is less than that amount (between £9.25 and £9.55 is deducted).
Employers claim reimbursement from HMRC of the input VAT, which it incurs when buying the goods or services for its employees. HMRC rejected Astra Zeneca’s claim, asserting that the company had to pay VAT in respect of retail vouchers it purchased if/when they were supplied to its employees as part of their remuneration packages (the employees, of course, are not taxable persons for the purpose of VAT).
Specifically, the ECJ ruled:
“Article 2(1) of the Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment, as amended by Council Directive 95/7/EC of 10 April 1995, must be interpreted as meaning that the provision of a retail voucher by a company, which acquired that voucher at a price including value added tax, to its employees in exchange for their giving up part of their cash remuneration constitutes a supply of services effected for consideration within the meaning of that provision”.
The judgment is bad news for employers and employees who have enjoyed the benefit of salary sacrifice schemes in relation to a whole range of VAT free purchases and services from bicycles to gym memberships.