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.
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
- 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).
- 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.
- 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.
- 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.
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.
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.
Review their technology solutions to be able to deal with the VAT, including being able to provide reports top their clients.
Potential opportunity to recover unpaid output tax where input tax has been recovered.
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.
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