An EU ruling on voluntary benefits and salary sacrifice could cost employers £0.5 billion in unpaid VAT. According to law firm BDO, the opinion of the Advocate General of the European Court of Justice (ECJ) in the case taken by AstraZeneca (AZ) on the VAT treatment of retailer vouchers, provided by AZ to its employees as part of their remuneration package, could cost employers around £0.5 billion over the past four years in unpaid VAT; and over £100 million per year going forward.
The Advocate General considers VAT should be paid to HMRC by AZ on vouchers given to its employees. According to the advocate general, the salary sacrificed by employees is payment for the vouchers.
This view was based, in part, on the fact that the value of the voucher included the VAT that would be paid by a retailer when it was exchanged for goods (or services) and in part because the vouchers were provided in exchange for a given sum of money.
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If the ECJ follows the opinion of the Advocate General, it will be a departure from HMRC’s historic position whereby salary sacrifice arrangements are not treated as ‘consideration’ for VAT purposes. It has accepted that AZ would be entitled to recover VAT it has paid on the purchase of the vouchers but only insofar as it accounts for VAT on the provision of those vouchers to staff. If such VAT is not accounted for the Advocate General considers that AZ would not be entitled to recover the VAT on the voucher purchase.
Marc Welby, VAT Partner at BDO, said: “This opinion from the Advocate General, if followed by the European Court, will result in many employers who have introduced similar voucher and salary sacrifice arrangements being landed with a substantial additional tax liability. It will also cause confusion as the salary sacrificed is not treated as a payment for direct tax and National Insurance purposes.”
“Over recent years vouchers and salary-sacrifice schemes have become a significant and particularly tax effective part of structuring employee remuneration and this case will result in all employers needing to review such arrangements. There will be significant costs involved and any resultant changes will have major repercussions for many businesses.”
The Advocate General’s opinion also contained details of the European Commission’s submissions that the UK’s method of calculating VAT on vouchers is incompatible with EU law.
Welby added: “Aside from the extra costs that employers will face if the opinion is confirmed by the Court, there is also a very real risk of the EU Commission commencing infraction proceedings against the UK. This could prove to be a double whammy for employers.”
