The European Court of Justice (ECJ) has ruled that output VAT must be paid on retail vouchers given to staff under salary sacrifice schemes, which allow employees to elect to take certain benefits in lieu of salary as part of their remuneration package.
The ECJ made their decision because when providing the vouchers, the employer is providing a service and the salary sacrificed by the employee is payment for this service. However the employer can reclaim the VAT incurred on the purchase of the vouchers.
Salary sacrifice schemes allow employees to elect to take certain benefits such as retail vouchers, extra holiday entitlement or private healthcare in lieu of salary as part of their remuneration package.
It is likely that there are a number of employers that have not accounted for tax when providing the vouchers as HMRC had previously appeared to accept that salary sacrifice was not deemed consideration for the supply of a services and therefore not subject to VAT.
The ruling means it is now likely that HMRC will begin to assess employers schemes to work out the outstanding VAT owed. They are entitled to assess employer`s for any output tax due over the last 4 years.
Whilst this decision only applies to retail vouchers, it is expected that HMRC will now assess other benefits to see if VAT can also be collected on these.