Since January, businesses have had to pay VAT on non-cash goods and services provided to employees in exchange for some of their salary.
Employers will still be able to reclaim tax paid to suppliers for the goods and services as input tax.
The change to the VAT treatment of salary sacrifice schemes, which often include such as bikes, childcare vouchers, and high street shopping vouchers, follows a ruling last year by the European Court of Justice (ECJ) over a tax dispute between AstraZeneca UK and HMRC.
Astra bought retail vouchers at less than their face value and passed them on to employees at that discount – the cost of which was then deducted from their employees’ pre-tax salary.
The dispute with HMRC was triggered after Astra argued that it did not have to charge VAT on the supply of vouchers to the employees.
The ECJ agreed with HMRC, ruling that the salary sacrificed was a supply of services in return for a payment and was therefore subject to VAT. Before the court ruling it was generally assumed that salary sacrifice schemes would not be subject to VAT.