Businesses that fail to review their employee benefit packages or don’t look at the VAT implications for new benefits do so at their peril following a new approach introduced by the taxman, warns accountants James Cowper.

Salary sacrifice schemes and the provision of benefits have long been a thorn in the side of HMRC, but VAT historically was not an issue where employees receive benefits through salary sacrifice schemes. This changed when a new 20% VAT liability for employers and employees, the result of a European Court of Justice decision, came into force on 1 January.

Head of VAT Service at James Cowper Ruth Corkin explained: “The impact of the new VAT treatment is set to be wide-ranging. Benefits such as shopping vouchers, gym membership, subsidised meals at work and cycle to work schemes are all affected. Employers must now either not claim input tax relating to these supplies, at a cost to the business, or charge the employee output tax on the value of the benefit.

“Charging staff would, of course be highly unpopular, particularly at a time when pay freezes are commonplace and I fear that companies will in some cases decide the lesser of two evils is to simply in future slash their benefit packages.”

The VAT charge does not affect employees with salary sacrifice contract dates on or before 27 July 2011 but will still apply to them when their benefits contracts are renewed or renegotiated. Benefits that are available to all staff, like a workplace gym, are also not affected.

Ruth added: “Employers have been steadily waking up to the VAT charge since the New Year. HMRC is also clearly focusing on the issue because questions about benefits in kind packages have been asked on a number of inspections that I have attended recently. Leaving the VAT issue to one side is likely to cause headaches for businesses at an inspection. Add to that interest and penalties and it could be an expensive issue to ignore.”

Companies that have traditionally provided benefits by way of salary sacrifice should now be reviewing their benefit packages to see which benefits would attract a VAT charge. James Cowper recommends that any business concerned about how it could be affected by the new rules seeks professional guidance.