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Firms Face VAT Bills After ECJ Ruling


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Dec 29, 2008
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A landmark ruling in the European Court of Justice (ECJ) has called into question the benefits and effectiveness of certain salary sacrifice arrangements offered by employers.

Global pharmaceutical company, Astra Zeneca, has lost its case on the value-added tax (VAT) treatment of retailer vouchers provided to employees as part of their remuneration package.

The UK tax authority, HM Revenue and Customs (HMRC), has now been told by the ECJ that it should be collecting VAT on certain salary sacrifice schemes, a move which law firm DLA Piper estimates could cost employers GBP500m over the past four years in unpaid VAT, and over GBP100m per year going forward.

“The ruling means that businesses which use this, or any similar voucher and salary sacrifice arrangements, will have to review the VAT treatment of benefits on offer to their employees and may look to restructure their systems to make sure any benefits are free of VAT liability," observed Richard Woolich , tax partner at DLA Piper London.

“Employers may face poor take-up of the schemes in the workplace if they pass on the VAT cost to employees. It is not clear to what extent HMRC may seek to recover under-declared VAT for previous years," he added.

Salary sacrifice schemes allow employees to elect to take certain benefits such as retail vouchers, extra holiday entitlement or private healthcare in lieu of salary as part of their remuneration package.

The schemes, which are common among larger companies, have become popular as a means of promoting employee loyalty and performance, whilst saving income tax and national insurance costs.

The ECJ's decision follows that of the Advocate General in April, and it is expected that HMRC will now begin to assess employers for the output tax due.

Steve Hodgetts, VAT partner at Baker Tilly, the chartered accountants and business advisers, warns: “Many employers were shocked at the AG’s opinion delivered in April but have waited until this judgement was released before looking at their own salary sacrifice schemes."

Hodgetts advises potentially affected companies to examine their salary sacrifice arrangements "as a matter of urgency."

"It is likely to cost them a substantial amount of money as HMRC is entitled to assess employers for any output tax due over the last 4 years," he said.


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