Last August, the CJEU ruled in favour of HMRC and required Astra Zeneca to account for VAT on the salary sacrificed by its employees for retail vouchers.

This week HMRC said that its interpretation of the ruling, due to take effect from next January, was that businesses providing benefits under arrangements which qualify as salary sacrifice schemes for VAT purposes, must now account for output VAT on these supplies.

David Hosking, managing director of Tusker – which has over 50 salary sacrifice car schemes in operation covering over 300,000 employees – welcomed the clarification from HMRC and said: ‘This will cause issues for schemes that aren't properly structured and it is now even more imperative that employers appoint a salary sacrifice provider with the appropriate experience and expertise in this arena to avoid the pitfalls this interpretation now throws up.

‘The provision of company cars via salary sacrifice will not be impacted by the HMRC guidance provided VAT recovery is restricted, either by 50% or 100%, and output VAT is not due, which is the case with all Tusker's schemes.

‘It's also imperative that any salary sacrifice car arrangements should be reviewed in their entirety to ensure all the constituent elements, for example maintenance, are correctly treated,’ he said.

Hosking also stressed that in relation to cars, the new rules only apply to salary sacrifice arrangements where it is perceived that employees are buying or paying for benefits or services from their employer, such as retail vouchers.

He explained: 'Take the example of an employee who starts with an annual salary of £30,000 and assume that the annual equivalent salary sacrifice for a car is £4,000. The employee is still paid £30,000 but gets £26,000 in cash and £4,000 by way of the right to the loan or bailment of the company car as a Benefit in Kind.

‘In this example, the employer is "paying" £30,000 to the employee as consideration for the employee's services under the employment contract. It does not involve a "payment" by the employee. The whole salary is still being paid by the employer to the employee, part of it is still in cash, but part of it is now being paid in kind. 

‘In other words, far from being a "payment" by the employee, the amount of the salary sacrifice is still actually a receipt by the employee. It is consideration in kind – the bailment or loan of the car to the employee in return for his or her services under the employment contract,’ he said.