Salary sacrifice and voucher schemes: European court ruling means employers may be forced to pay millions in unpaid VAT

Employers that offer retail vouchers as part of salary sacrifice schemes could be forced to fork out up to £500m in unpaid VAT, a law firm has cautioned.

The warning follows an opinion issued by the Advocate General of the European Court of Justice earlier this week on a significant case involving pharmaceutical giant AstraZeneca and the complex area of VAT and the treatment of retail vouchers.

The Advocate General recommends that VAT should be paid to HM Revenue & Customs on vouchers given to employees, as the salary sacrificed by the employees is payment for the vouchers.

The European Court will consider the opinion before it gives its final ruling later this year.

But law firm BDO LLP warned that the move could have cost employers around £500m over the past four years in unpaid VAT and more than £100m per year in future.

Firms usually recover VAT on the vouchers they buy from an intermediary before passing them on to staff, but they often do not account for VAT when passing the vouchers on to employees.

The Advocate General accepted that AstraZeneca could claim for VAT it has paid on buying vouchers, but only if the firm accounts for the VAT when passing the vouchers on to staff.

Marc Welby, VAT partner at BDO, warned the potential move would cause confusion and result in many employers who have introduced similar voucher and salary sacrifice arrangements being landed with a substantial tax liability.

“Over recent years, vouchers and salary sacrifice schemes have become a significant and particularly tax-effective part of structuring employee remuneration and this case will result in all employers needing to review such arrangements,” he said. “There will be significant costs involved and any resultant changes will have major repercussions of businesses.”

Welby also highlighted that employers could face the prospect of revenue and customs ‘knocking at the door’ and ‘issuing assessments for VAT’.

He told Personnel Today: “Employers should carry out a review of not just voucher schemes but any other salary sacrifice arrangements because the implications of this opinion is that potentially all salary sacrifice arrangement may lead to a VAT liability.”

Giles Salmond, a director in the tax dispute resolution group at Deloitte, who advised AstraZeneca in this litigation, said: “This is an important step in clarifying how the complex VAT rules on vouchers should be applied. If the Advocate General’s opinion is followed, businesses may have to revisit how they deal with vouchers as part of salary sacrifice schemes.”

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