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Tax ruling set to raise salary sacrifice costs

Date: 08 August 2011

Providing company cars via salary sacrifice could incur an additional cost following a Court of Justice of the European Union ruling.

The CJEU ruled in favour of Her Majesty's Revenue and Customs concerning pharmaceutical firm Astra Zeneca, requiring it to account for VAT on salary sacrificed by employees for retail vouchers in August 2010.

Astra Zeneca operated a flexible remuneration package scheme under which staff could take part of their remuneration in the form of shopping vouchers rather than as a salary.

The court found the provision of vouchers "amounted to a supply of services effected for consideration". As a result, while the business was able to recover VAT incurred on acquiring the vouchers, output tax was due on the consideration received from its staff.

HMRC has now issued a briefing on what the ruling means for employers providing benefits to staff, including company cars, via sacrifice schemes.

Deloitte Car Consulting director Nathan Male said: "We are currently in dialogue with HMRC to obtain some clarity around the precise application of its guidance, but our current view is that where employers are making cars available via salary sacrifice, there may be an additional VAT cost to the employer." The main area of concern is the likes of maintenance payments rather than the lease itself.

Effective from 1 January 2012, Male added that based on the current briefing it is likely the rules will also apply to cars already sourced through salary sacrifice schemes. "This is one of the practical issues we will be discussing with HMRC," he said.

Mike Moore, Deloitte Car Consulting director, added: "We're expecting that employers will seek to pass any additional cost on to the employee. We still believe that schemes will be attractive to staff."

David Hosking, MD of Tusker, which has more than 50 salary sacrifice car schemes covering over 300,000 employees, welcomed the clarification from HMRC and said: "This will cause issues for schemes that aren't properly structured.

He added: "The provision of company cars via salary sacrifice will not be impacted by the HMRC guidance provided VAT recovery is restricted, either by 50% or 100%, and output VAT is not due.

"It's also imperative that any salary sacrifice car arrangements should be reviewed in their entirety to ensure all the constituent elements, for example maintenance, are correctly treated," Hosking said.

BVRLA chief executive John Lewis commented: "Salary sacrifice car schemes are typically based on an underlying leasing agreement between an employer and a leasing company.

"The HMRC guidance on salary sacrifice schemes clearly states that the European Court of Justice ruling will have no impact on the leasing of company cars. This is because employer VAT recovery on the leasing of cars is already restricted. However, a question mark remains over how the ruling will impact any maintenance agreement included as part of the lease."

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