AstraZeneca UK Ltd v HMRC
DECISION
On 29 July 2010, the European Court of Justice (ECJ) delivered its judgment in AstraZeneca UK Ltd v HMRC Case C-40/09 ECJ. The reference to the ECJ was for a preliminary ruling on the VAT implications of an employer issuing to its employees vouchers with a cash value exchangeable for goods or services at certain well-known retailers, in return for the employees giving up part of their remuneration (a salary sacrifice). The ECJ’s ruling that the remuneration given up constitutes consideration for the issue of the vouchers, giving rise to a VAT liability for the employer, has important implications for employers running similar schemes.
PREVIOUS LAW AND PRACTICE
Where goods or services are provided to employees for their private use and for free, there is a supply deemed to be made equal to the cost to the employer of providing the goods or services. In the UK, there is a threshold for goods of £50 per gift, or per series of gifts to the same person in the same year, below which there is no deemed supply. These rules are known as the business gift rules, and are applicable generally, not just to gifts to employees. In the context of employees, HMRC guidance confirms that employees’ services under their employment contracts are not seen as consideration.
In practice, HMRC has not sought to impose output VAT on certain benefits provided to employees in circumstances where the benefits have effectively been paid for out of salary, even though the input tax on the purchase of those benefits has been deductible.
SALARY SACRIFICE CONSIDERATION PROVISION OF BENEFITS
“Consideration” has a community meaning and means everything received in return for a supply of goods or services. “In return for” means there must be a “direct link” between the supply and the consideration. Is it possible to avoid this “direct link” in the employment context where the parties want certainty? To break the direct link would mean to divorce the salary sacrifice from the value of the benefits awarded. Effectively, the employees would need to accept “lower” salaries, irrespective of the award of the vouchers they may or may not receive. There could be no contractual link between the reduction in salary and the value of vouchers awarded.
IMPLICATIONS OF THE DECISION
HMRC will need to review its law and practice in relation to this sort of scheme where benefits, not only vouchers, are awarded in return for a reduction in salary. The case means that HMRC can no longer ignore output tax being chargeable where benefits are provided in return for a reduction in salary.
HMRC could implement the changes only for the future, or could assess employers for VAT for the past four years. No announcement has yet been made as to what HMRC intends to do about the ruling.
Employers that have reclaimed input VAT, but not accounted-for output VAT, are the most vulnerable. Those employers who have not reclaimed input VAT should not be at risk of real cost overall because the input VAT reclaim should equal the output VAT payable as a result of this case, assuming there was no profit margin for the employer built into the salary sacrifice.
Employers that operate salary-sacrifice arrangements should review their schemes urgently to check the VAT ramifications. Certain benefits, eg, pension contributions, will not give rise to a taxable supply. Retail vouchers issued by the retailer to its own employees, giving employees the right to redeem the voucher in return for the retailer’s own goods would not generally give rise to a supply.
Richard Woolich, tax partner, DLA Piper
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