Salary Sacrifice Arrangements

HM Revenue & Customs (HMRC) has confirmed that, from 1 January 2012, businesses must account for VAT on the supply of VATable benefits provided to employees under salary sacrifice arrangements. Therefore, from that date, businesses must account for output tax on the supply of VATable benefits provided under salary sacrifice, as well as salary deduction arrangements.

HMRC's decision not to seek underpaid output tax from employers will be welcomed by businesses who have provided VATable benefits to employees under salary sacrifice arrangements and reclaimed the input VAT. Similarly, its decision to apply its revised view from 1 January 2012, will also be welcomed as it gives businesses time to review (and where necessary) unwind arrangements before output tax becomes due.

Where VATable benefits are provided under salary sacrifice arrangements, employers will have to consider the VAT costs of providing them. For example, the potential loss of VAT recovery on childcare voucher administration fees, on top of the recent changes to the regime for new joiners, which have created a significant additional administrative burden for employers, may lead businesses to conclude that the costs of providing them outweigh the benefits.

This checklist highlights the various salary sacrifice arrangements that can be used by a business and the impact of the new VAT rules on them.

For further information, please contact our Business Law Team.

 

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