Newsletter Autumn 2011

Making sacrifices

If you have a flexible pay package, you may be affected by a recent HMRC announcement. Where an employee agrees to take less pay in exchange for some other benefit – a ‘salary sacrifice’ – HMRC have in the past treated that as not VATable as long as it was a once-a-year decision and didn’t appear as a deduction on the payslip. For example, salary could drop by £1,000, the employer would buy a bike for £1,000 and loan it to the employee under a ‘cycle-to-work’ scheme, and then after a year the bike would be sold at a knock-down second-hand value to the worker. There are advantages of this for income tax and national insurance, and there were also advantages for VAT.

Then the European Court decided that the worker was really paying for the employer to supply something. The case was about retailer vouchers, but it could apply to other situations where salary is given up for a range of benefits. If the thing supplied is VATable, the employer will have to account for VAT on the value of the salary forgone. HMRC are only changing their policy from 1 January 2012, to give people time to adjust, but there may be annual arrangements in place that won’t have finished by then.

If this affects you as employee or employer, we can help you understand the consequences.