Salary sacrifice

HMRC suggests two treatments for salary sacrifice arrangements

For salary sacrifice agreements in place before 28 July 2011 which extend beyond 31 December 2011, HMRC will allow existing treatment to continue until the earlier of the: 

  • date the agreement expires
  • date the fixed number of salary sacrifice payments as specified by the agreement ends
  • date of the employee’s annual salary/benefits review
  • date of any review or renegotiation where the agreement or the employment contract is changed.

For salary sacrifice arrangements made and agreed to on or after 28 July 2011, VAT will need to be accounted in accordance with Revenue & Customs Brief 28/11.

Examples are included within the annex of Revenue & Customs Brief 28/11 and include common circumstances such as: 

Cycle to work scheme:

‘under the Cycle to Work Scheme employers purchase bicycles and safety equipment and provide them to employees. Where this has been done under a salary sacrifice arrangement, the effect of the judgment is that employers must account for output tax based on the value of the salary foregone by the employee in exchange for the hire or loan of a bicycle.’ 

Face value vouchers:

‘in the case of supplies made under a deduction from salary arrangement input tax is recoverable but output tax must be declared.’ 

Childcare vouchers:

‘childcare vouchers are not directly affected by the judgment as they are not subject to VAT. However, employers that incur administrative fees from their voucher provider have, to date, been permitted to recover VAT on those fees as a general business overhead.

However, because the fees are directly attributable to the exempt supply of vouchers the normal partial exemption rules must be applied with the result that the VAT incurred may no longer be fully recoverable.’

Food and catering provided by employers:

‘where employees pay for meals etc under a salary sacrifice arrangement, employers must account for VAT on the value of the supplies unless they are zero-rated.’

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