Clement Keys
Chartered Accountants

The decision by HM Revenue & Customs (HMRC) to tax salary sacrifices is yet another burden on SMEs and could make running such schemes significantly more expensive, especially for businesses that are compelled to register for VAT as a consequence of this change in policy, says chartered accountant Clement Keys.

The overriding advantage of salary sacrifice schemes is their tax efficiency – they enable both employer and employee to save National Insurance Contributions, while the employee also pays a reduced amount of income tax because the sum sacrificed is no longer classed as part of their salary. However, from 1 January 2012 employers could have to account for VAT on the non-cash benefits they provide to their employees in lieu of salary. 
 
Steven Simmonds, Director of VAT Services at Clement Keys, says HMRC has changed its stance on this issue following the European Court of Justice decision in a case involving pharmaceutical conglomerate AstraZeneca. As a consequence, a reduced salary accepted in return for a package of benefits may now be considered a supply for VAT purposes and employers may therefore need to account for VAT on the amount of the salary reduction or on the true value of the benefits provided.
 
“This ruling is another example of unnecessary extra burdens that will make life more difficult for small business,” says Mr Simmonds. 
 
“In addition to adding extra expense, in some cases it will not be very environmentally friendly, since the Cycle to Work Scheme will be one of the key benefits affected.
 
“Other benefit affected will be food/catering or retail vouchers, for example, if employees agree to forgo part of their salary in return for them. Under the new rules this could create a significant VAT liability for businesses and employers will have to decide whether to carry the cost or pass and it on to their staff.”
 
Having to account for VAT on salary sacrifice could also raise important issues for unregistered businesses, which could be required to register for VAT even if their general business activities are exempt or their turnover is below the registration threshold. SMEs that find themselves in this position need to take action promptly, since late registration can result in costly penalties.
 
“It is vital that businesses seek specialist advice on the VAT and tax implications of this policy change as a matter of urgency, to ensure that existing schemes and any future plans are as tax efficient as possible after January 2012,” adds Mr Simmonds.
 
“This policy change does not impact on benefits that employers provide free of charge to their entire workforce, but it is important to remember that employers are already liable to account for VAT if an employee buys certain goods and/or services from the business by way of a deduction from their salary.”