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In the Upper Tribunal (UT) case of Pertemps Limited the issue was whether the operation of the respondent’s salary sacrifice scheme to provide travel and subsistence payments to employees was a supply for VAT purposes and, indeed, whether it was an economic activity at all.
I have considered what is an economic activity (business) many times, examples here, here, here and here. It is a perennial VAT issue and goes to the very heart of the tax. EU legislation talks of economic activity, which is taken to be “business activity” in the UK. There is no legal definition of either economic or business activity so case law on this point is very important.
Background
Employees of the respondent were offered the option of;
- being paid a salary, from which they would have to meet any travel and subsistence expenses, or
- participating in Pertemps’ scheme where they would be paid their travel and subsistence expenses but receive a reduced salary.
The amount of the reduction was equal to the amount of the expense payment plus a fixed amount to defray the costs of running the scheme. The issue was whether the charge for using the scheme was taxable.
HMRC’s appeal against the FTT decision [2018] UKFTT 369 (TC) was based on the view that the scheme involved a taxable supply of services by Pertemps to its participating employees such that output tax was due of the fixed payments. The FTT concluded that Pertemps did supply services to the employees. but the supply was not within the scope of VAT because the operation of the scheme was not an economic activity. It allowed Pertemps’ appeal. The FTT also held that, if there had been a supply, it would have been exempt.
Decision
The UT decided that, although the FTT erred in law when it concluded that Pertemps made a supply of services to the employees who participated in the scheme, it was correct when it concluded that Pertemps was not carrying on any economic activity when it provided the scheme for employees. The charge only arose in the context of the employment relationship, and it could not be compared to an open market supply of accountancy services.
Therefore, HMRC’s appeal was dismissed.
Commentary
Care should always be taken with salary sacrifice schemes. Some, but not all, sacrifices are subject to output tax. HMRC internal guidance on the subject here. This case is a helpful clarification on the matter of certain charges to staff. It also adds another layer to the age-old issue of what constitutes a business activity. VAT is only due on business supplies, and it is crucial to appreciate what is, and isn’t an economic activity. This is especially important in respect of charities and NFP bodies.