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August 9, 2010

The Astra Zeneca ruling gives revenue authorities an opportunity to collect overdue VAT on employee benefit salary sacrifice plans - in the UK HMRC’s case this could be up to four years of back tax.

The recent 29 July 2010 European Court of Justice judgment on the case of Astra Zeneca UK Ltd v Commissioners for HMRC clarifies the position in respect of VAT charged on the provision of retail vouchers to employees as part of their remuneration.

In this Tax Advisor Update Alert, Sarah Pickering details a summary of the court findings and the implications for salary sacrifice and flexible benefit plans.

Background
Employees received an annual fixed remuneration package called the “Advantage Fund” which consists of cash and benefits chosen by the employees. In effect, the employee sacrifices cash salary and receives an additional package of benefits which they have chosen. One of the benefits Astra Zeneca offered was retail vouchers for high street stores which had a nominal face value of £10 but which, if selected, reduced the employees’ benefit fund by between £9.25 and £9.55. The company claimed that the supply of the vouchers was a business overhead. Therefore, it was entitled to deduct the VAT resulting from that acquisition and, not charge output VAT on the provision of the vouchers to its employees since the vouchers were not provided for consideration.

The European Court of Justice Findings

  1. Astra Zeneca was a person supplying services and therefore was carrying out an economic activity (see Commission v Netherlands; Commission v Spain; Commission v Greece).
  2. As the vouchers could be used to buy a range of goods or services which were indeterminate this was not a supply of goods within the meaning of Article 5(1) of the Sixth Directive, but therefore was a supply of services.
  3. There was a direct link between the service provided and the consideration received; therefore a supply of services was provided for consideration (see Case 102/86 Apple and Pear Development Council v Commissioners of Customs and Excise; Fillibeck v Finanzamt Neustadt ; Commission v Greece; Commission v Spain), which was the giving up of salary in return for the vouchers.
  4. The consideration received was capable of being expressed in money (see Fillibeck v Finanzamt Neustadt) i.e. the value received £9.25 - £9.55.

Therefore the provision of a retail voucher by a company, which acquired the voucher at a price including VAT, to its employees in exchange for their giving up part of their cash remuneration constituted a supply of services effected for consideration within the meaning of Directive 95/7/EC of 10 April 1995.

The Implications

The Employer

  • If HMRC decides to take the point, in cases where there is no inherent VAT on the procurement of the benefits or where input tax has been claimed, they could assess for underpaid VAT for the last four years.
  • The input VAT should generally equal the output VAT so no additional cost, unless the Employer has been recovering input tax without paying output tax.
  • Review the salary sacrifice arrangement to identify all the potential “supplies of a service”.
  • Review the use of salary sacrifice arrangements in benefit provision especially where linked to vouchers.
  • Communicate any change to employees.

The Employee

As they are effectively incurring VAT on the vouchers, it is less cost effective to redeem them against items which would be zero rated (eg children’s clothes, books, certain foods) as they are paying a VAT inclusive price for a non vatable good.

The Retailer

No change. If the goods or services purchased by the employee are subject to VAT then they will account for it in the usual way once the voucher is redeemed.

The Administrator

Review their technology solutions to be able to deal with the VAT, including being able to provide reports top their clients.

Revenue Authorities

Potential opportunity to recover unpaid output tax where input tax has been recovered.

Recommendation
Businesses operating salary sacrifice schemes should review the benefits available to employees to determine if this case will have an impact on the value of benefits to the employees or on the cost to the business of providing them.

Authors:
Sarah Pickering
Managing Director
London
Telephone: +44 207 663 0445

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