VAT and Salary Sacrifice: Changes Ahead

Posted by admin at 15:51 on 13 Feb 2017


Karen Mulcahy from The VAT Consultancy informs us of the changes ahead.


The provision of salary sacrifice schemes was probably not anticipated in 1973 when VAT was first introduced in the UK and this is evident from the number of cases concerning the treatment of employee contributions which have been considered over the years. Nevertheless, and irrespective of what has gone before, the decision in the Astra Zeneca case earlier this year has helped to provide clarity, and HMRC have since issued two Business Briefs (28/11 and 36/11) on the issues.

Historical Position

Prior to the Astra Zeneca case decision, HMRC policy was to make a distinction between the VAT treatment of supplies of goods and services to employees by deduction from salary (VAT claimed on the cost, and VAT payable on the amount deducted), and those provided under a salary sacrifice arrangement (VAT claimed on the cost but no VAT payable on the amount of salary sacrificed) albeit that both resulted in the employee ending up with less 'cash' at the month end.

The Astra Zeneca Decision

The essence of the European Court decision is that there is no longer a distinction between deductions from salary and salary sacrifice. This being the case, HMRC have taken the view that whilst it is appropriate for a business to claim the VAT element of such costs, the business must also account for and pay VAT (where appropriate) in respect of the amount of salary either deducted or sacrificed, thus providing a common approach for both.

What Now?

With effect from 1 January 2012, the amount on which VAT will be due, under salary deduction or sacrifice schemes, will be the amount deducted from the employee. However, where the amount charged or deducted is less than the cost to the employer, VAT will be due on that cost value.

These changes do not, however, apply where the salary sacrifice arrangements were already in place on or before 27th July 2011 (the date of the Astra Zeneca decision) or a fixed term arrangement expires. In such cases VAT will continue not to be due until the arrangements are reviewed or the term expires.


Employers should, nevertheless, take care to not charge and/or account for VAT on supplies which are exempt from VAT, for example: - nursery vouchers pension contributions, and supplies on which VAT has been claimed by the businessVAT will also not be due where no charge, deduction or sacrifice is made, such as free or subsidised meals, as long as they are made available to all employees.


This is a good opportunity for businesses to review the current arrangements and get their house in order ahead of 1st January 2012. The outcome of the Astra Zeneca case should probably not come as any great surprise, and in a number of ways simplifies the VAT treatment, by treating similar things in the same way and appears to provide a further level of fiscal neutrality. Albeit that the result is a further amount of VAT payable by the business (as charged to the employee) this approach does follow the basic principles of VAT, in applying VAT to supplies of goods and services when supplied by a VAT registered business. It doesn't, however, mean that the new approach is going to be popular!

The RM2 Partnership recommend The VAT Consultancy as the leading VAT and Customs Duty advisory business providing independent, professional advice to both businesses and professionals.

For more information on this topic please contact Karen Mulcahy directly on or call 01962 735350.