Employer VAT Issues for Childcare Vouchers
HMRC have announced changes to the treatment of VAT which could have repercussions for some salary sacrifice schemes. The changes are due to be 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 will now incur a VAT liability.
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.
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 VAT may be payable by the employer on related administrative costs.
The new rule will not apply until next year. Until 31 December 2011, no VAT will be payable on salary sacrificed, other than that used to buy high street vouchers, so VAT won’t be payable by the employee. From 1 January 2012, however, the terms of the European Court of Justice ruling will apply, and VAT, where appropriate, will be payable.