Employers are being urged to review their salary-sacrifice retail voucher arrangements following a European Court of Justice (ECJ) ruling that VAT must be paid on vouchers handed out to staff.
The ECJ has followed the Advocate General’s opinion, which was delivered in April, and recommended that VAT should be paid to HM Revenue & Customs (HMRC) on vouchers given to employees, as the salary sacrificed by the employees is payment for the vouchers.
Law firm BDO previously warned that the decision could cost employers about £500 million over the past four years in unpaid VAT and more than £100 million per year in future.
The ruling means it is now likely that HMRC will begin to assess employers for the VAT – known as output tax.
According to business advisers Baker Tilly, there are likely to be a number of employers that do not account for output tax when providing the vouchers.
Steve Hodgetts, VAT partner at Baker Tilly, told Personnel Today: “We suspect many employers will not have been doing that because they wouldn’t have thought of it. For some large corporates, paying VAT on the value of the vouchers could be quite a substantial cost. The reason why it is ‘VATable’ is because the employee has given up salary in return for the vouchers. The salary which they have forgone is deemed to be income of the employer.
“What this decision does is highlight all other areas of salary sacrifice. This particular decision only applies to retail vouchers but there may well be other packages/benefits that employees receive, like cars for example, which I would expect HMRC to now review to determine whether they can collect VAT upon it.”