VAT not reclaimable from January 2012
HMRC have announced changes to the treatment of VAT which could have repercussions for some salary sacrifice schemes. The changes were implemented from 1 January, 2012, and follow a ruling by the European Court of Justice. The effect of these changes could see an increase in the overall costs and administration charges of some of these benefits.
Salary sacrifice schemes enable employees to sacrifice some of their salary for non-cash benefits, and have traditionally been used for industry for pension contributions, loan bikes, child care vouchers, gym membership and high street shopping vouchers. The court ruling means that some of these benefits may incur a VAT liability. (see note on PE4050 below)
VAT Not Reclaimable for Childcare Vouchers Schemes
The decision comes as a result of a European Court of Justice (ECJ) ruling in a case regarding pharmaceutical giant Astra Zeneca and the high-street shopping vouchers it provided to its employees. The ECJ ruled that the giving of vouchers was a supply of services in return for payment. This meant that Astra Zeneca was able to reclaim VAT it had paid on the vouchers, but therefore that VAT was due on the salary sacrificed by its employees.
The important question for parents is: “Will this ruling result in parents having to pay more for their Employer Childcare Voucher Schemes and other independent Childcare Voucher Schemes?” The short answer to this is no, but employers may have to pay additional charges on the administration costs of running these schemes, unless they can apply the De Minimis rule.
Many employers offer salary sacrifice arrangements which often include schemes like cycle-to-work, childcare vouchers and high-street vouchers schemes. Salary sacrificed in exchange for items that are liable to VAT, including bikes and high-street vouchers, will now itself be liable to VAT. However, as childcare is exempt from VAT, the supply of childcare vouchers and other similar VAT-exempt benefits, like private medical insurance and dental plans, will not be directly affected, although input tax may not br reclaimable by the employer on related administrative costs.
Note on PE4050 - partial exemption
There is a little known rule, the De Minimis rule, which allows partial exemption relating to transactions that you would not normally be able to reclaim input tax on. This allows you to reclaim the VAT on the management fee charged for using the childcare voucher service,
This is given in regulation 106 and confirms that a business may deduct his exempt input tax if he fulfils the following conditions:
- it is not more than £625 per month on average; and
- it is not more than 50% of all input tax incurred.