Pictured: Steven Simmonds
The decision by HM Revenue & Customs (HMRC) to tax salary
sacrifices is yet another burden on SMEs and could make running
such schemes significantly more expensive, especially for
businesses that are compelled to register for VAT as a consequence
of this change in policy, says chartered accountant Clement
Keys.
The overriding advantage of salary sacrifice schemes is their
tax efficiency - they enable both employer and employee to save
National Insurance Contributions, while the employee also pays a
reduced amount of income tax because the sum sacrificed is no
longer classed as part of their salary. However, from 1 January
2012 employers could have to account for VAT on the non-cash
benefits they provide to their employees in lieu of salary.
Steven Simmonds, Director of VAT Services at Clement Keys, says
HMRC has changed its stance on this issue following the European
Court of Justice decision in a case involving pharmaceutical
conglomerate AstraZeneca. As a consequence, a reduced salary
accepted in return for a package of benefits may now be considered
a supply for VAT purposes and employers may therefore need to
account for VAT on the amount of the salary reduction or on the
true value of the benefits provided.
"This ruling is another example of unnecessary extra burdens
that will make life more difficult for small business," says Mr
Simmonds.
"In addition to adding extra expense, in some cases it will not
be very environmentally friendly, since the Cycle to Work Scheme
will be one of the key benefits affected.
"Other benefit affected will be food/catering or retail
vouchers, for example, if employees agree to forgo part of their
salary in return for them. Under the new rules this could
create a significant VAT liability for businesses and employers
will have to decide whether to carry the cost or pass and it on to
their staff."
Having to account for VAT on salary sacrifice could also raise
important issues for unregistered businesses, which could be
required to register for VAT even if their general business
activities are exempt or their turnover is below the registration
threshold. SMEs that find themselves in this position need to
take action promptly, since late registration can result in costly
penalties.
"It is vital that businesses seek specialist advice on the VAT
and tax implications of this policy change as a matter of urgency,
to ensure that existing schemes and any future plans are as tax
efficient as possible after January 2012," adds Mr Simmonds.
"This policy change does not impact on benefits that employers
provide free of charge to their entire workforce, but it is
important to remember that employers are already liable to account
for VAT if an employee buys certain goods and/or services from the
business by way of a deduction from their salary."