Tag Archives: VAT-fvv

VAT: Deductions from, and sacrifice of; salary

By   4 November 2024

This has been a difficult area historically, but as a result of the CJEU Astra Zeneca case, there is more certainty, although it was not beneficial for businesses. We look at the distinction between deductions from salary and salary sacrifice below, along with the VAT treatment of specific examples.

Current position

Generally, if deductions are made from salary for goods or services provided by an employer to their employees, these are liable to VAT. The remuneration an employee forgoes is consideration for the taxable benefits provided and output VAT will be due from, and input VAT recoverable, by the employer. Please see below for some specific circumstances.

Historical position

  • Deduction from salary – where an amount is deducted from an employee’s pay in return for a supply of goods or services by the employer. Output tax is due on the amount deducted from the employee’s salary and is input tax recoverable.
  • Salary sacrifice – for VAT purposes “salary sacrifice” describes an arrangement where an employee opts to receive optional benefits provided by the employer and forgoes part of their salary in return. Employees who choose to take a benefit have their employment contracts amended to reflect the new arrangements. No output tax was due as it was not deemed to be a taxable supply.

We have come across businesses who erroneously still apply the past rules – which changed on 1 January 2012.

Valuation

In most cases the value of the benefit for VAT purposes will be the same as the salary deducted or foregone. Where the true value is not reflected, for example where benefits are supplied below what it cost to acquire them, the value should be based on the cost to the employer.

Specific staff benefits

Cycle to work scheme

Under this scheme employers purchase bicycles and safety equipment and provide them to employees. Where this is under a salary sacrifice arrangement employers must account for output tax based on the value of the salary foregone by the employee in exchange for the hire or loan of a bicycle.

Childcare and childcare vouchers

Businesses that put arrangements in place whereby their employees forego part of their salary and allocate that salary to pay for childcare provided by a third party are not making a supply of childcare. Any related costs incurred by the business, such as payroll and administration, are general overheads of the business.

Face Value Vouchers

Where vouchers, such as those available from high street retailers, are provided under a salary sacrifice arrangement, input tax may be claimed and output tax is due on the consideration paid by the employee.

Food and catering provided by employers

Employers may provide their staff with free or subsidised meals, snacks, or drinks. Where employees pay for the meal the normal VAT treatment will apply. If employees make no payment, VAT is not due, provided the benefit is available to all staff. Where employees pay for meals under a salary sacrifice arrangement, employers must account for VAT on the value of the supplies unless they are zero-rated. An employer may claim the input tax incurred on related purchases, subject to the normal rules.

Cars

Most businesses are prevented from recovering VAT in full on the purchase and leasing of company cars. The input tax block on cars, generally: 100% on purchases, and 50% on leasing, means that employers do not account for output tax when cars are made available to employees. Where an employer suffers no input tax restriction, output tax is due.

More on motoring costs generally.

Benefits available to all employees for no charge

Where no charge is made no VAT is due. For example, the provision of a workplace gym available to all employees for no payment. Businesses can recover VAT incurred on providing such facilities as a business overhead.

VAT: Tax point of telecommunications – The Lycamobile case

By   7 August 2024

Latest from the courts

In the Lycamobile UK Ltd First-Tier Tribunal (FTT) case, the issue was whether VAT was chargeable on the supply of a “Plan Bundle” at the time when it was sold and by reference to the whole of the consideration that was paid for it, or whether VAT was instead chargeable only when, and only to the extent that, the allowances in the Plan Bundle were actually used. The time of supply (tax point) was important because not only would it dictate when output tax was due, but more importantly here, if the appeal succeeded, there would be no supply of the element of the bundle which was not used, so no output tax would be due on it.

Background

The Plan Bundles comprised rights to future telecommunication services; telephone calls, text messages and data (together, “Allowances”). There were hundreds of different Plan Bundles sold by the Appellant and the precise composition of those Plan Bundles varied.

Contentions

Lycamobile considered that that the services contained within each Plan Bundle were supplied only as and when the Allowances were used, so that the consideration which was received for each Plan Bundle would be recognised for VAT purposes only to the extent that the Plan Bundle was actually used. In the alternative, these supplies could be considered as multi-purpose vouchers such that output tax was not due when they were issued, but when the service was used. Very briefly, the contention was that it was possible that not all of the use would be standard rated in the UK.

Unsurprisingly, HMRC argued that that those services were supplied when the relevant Plan Bundle was sold (up-front) and output tax was due on the amount paid, regardless of usage.

Decision

The Tribunal placed emphasis on “the legal and economic context” and “the purpose of the customers in paying their consideration”.

It decided that the terms of the Plan Bundle created a legal relationship between Lycamobile and the customer. The Bundle was itself the provision of telecommunication services when sold. The customers were aware that they were entitled to use their Allowances and could decide whether to, or not. As a consequence, consumption was aligned with payment and created a tax point at the time of that payment. There was a direct link between those services and the consideration paid by the customer.

The Tribunal also considered the vouchers point. There were significant changes to the rules for Face Value Vouchers on 1 January 2019 (the supplies spanned this date), but the FTT found that the Plan Bundles were not monetary entitlements for future services under either set of rules, so the tax point rules for vouchers did not apply here.

The appeal was dismissed and HMRC assessments totalling over £51 million were upheld.

Commentary

Not an unexpected result, but an illustration of the importance of; tax points, legal and economic realities, and what customers think they are paying for. All important aspects in analysing what is being provided, and when.