VAT on vouchers and salary sacrifice arrangements
A recent decision by the European Court of Justice (ECJ) against the taxpayer will affect many businesses that use salary sacrifice schemes involving the purchase of vouchers. This could include the provision of vouchers which allow employees to buy bicycles with no VAT under many cycle to work schemes.
The taxpayer in this case was a large pharmaceuticals company that offered its employees retail vouchers. The vouchers were standard gift vouchers in £10 denominations and could be redeemed in a variety of high street shops.
The taxpayer argued that the cost of obtaining the vouchers was a business overhead on which they ought to be entitled to deduct VAT. HMRC disagreed and argued that the taxpayer was either not entitled to reclaim this input VAT, or, if it was entitled, it must thereafter account for output VAT on the value of vouchers provided to staff, on a sum equal to the salary sacrificed by the employee.
The taxpayer appealed to the First-Tier Tribunal. The Tribunal decided to stay the proceedings and referred a number of questions to the ECJ.
The ECJ primarily had to decide whether the provision of vouchers constituted a supply of services for consideration. The ECJ found that there was a direct link between the provision of retail vouchers by the taxpayer to its employees and the part of the cash remuneration which the employees gave up as consideration for that provision.
The ECJ ultimately decided that ‘the provision of a retail voucher by a company, which acquired that voucher at a price including value added tax, to its employees in exchange for their giving up part of their cash remuneration constitutes a supply of services effected for consideration within the meaning of that provision.’
This decision means that businesses providing retail vouchers to staff as a deduction from salary may no longer be able to claim back the VAT incurred on the acquisition of the vouchers.