HMRC has published its long awaited new policy towards VAT on staff benefits, resulting from the European Court’s decision in the AstraZeneca case in 2010. The new rules come into force on 1 January 2012 and are likely to create extra costs for employers operating staff benefit schemes.

WHAT IS CHANGING?

From 2012, HMRC will regard a staff benefit provided in exchange for a salary sacrifice or deduction as a supply for VAT purposes. This means benefits given in the form of taxable goods or services will be subject to VAT at the time that benefit is passed on to the  employee.  Previously, HMRC broadly accepted that businesses could recover VAT on benefits available to all staff with no requirement to make an onward VAT charge. HMRC has given a few examples of benefits it believes will be affected, including:

• hire or loan of bicycles under the Cycle to work scheme
• face value retail vouchers
• staff meals paid for under a salary sacrifice arrangement

HMRC says the supply should be valued according to the amount of salary foregone or, if greater, at the cost to the employer of providing the benefit. The new rules do not apply to benefits provided for the use of all employees for no charge or salary deduction. HMRC also states that childcare vouchers will not be subject to a VAT charge because childcare itself is normally exempt from VAT. However, partial exemption rules mean the employer might not be able to recover VAT on costs incurred when putting the scheme in place.

HOW WILL THIS AFFECT STAFF BENEFITS SCHEMES?

The new policy potentially affects many more situations than HMRC has listed, such as car parking, company car schemes or even VAT recovery on the costs of running a pension scheme. This creates uncertainty for employers, not to mention the practical difficulties of restructuring a staff benefits scheme partway through the business’ financial year. The high cost of staff remuneration and benefits means VAT on employment costs is a real risk area for organisations with large workforces. Businesses will have to identify which of their staff benefits will be subject to a VAT charge and put procedures in place to account for this VAT to HMRC.

It will also be necessary to decide whether to increase the value of the employee salary deduction to take account of the addition of VAT at 20%. Employers must also consider how the new rules might affect their VAT recovery position, e.g. VAT incurred on implementing and maintaining a VAT exempt benefit might be deemed irrecoverable under partial exemption rules.

WHAT SHOULD EMPLOYERS BE DOING NOW?

Employers should use the time before implementation to review their staff benefits scheme to determine which benefits could be subject to a VAT charge under HMRC’s new salary sacrifice rules, and how this will affect VAT recovery on the cost of purchasing the benefit and possibly on other overheads.

Our thanks go to our strategic partner PKF(UK) LLP for this important update.