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HMRC internal manual

VAT Supply and Consideration

Consideration - Payments that are Consideration: What is the VAT status of salary sacrifice arrangements?

Generally in the case of benefits provided to employees by their employers it is necessary first to establish the input tax position of the items before being concerned about whether consideration is paid by the staff for the benefits. It is unnecessary to worry about output tax if an item is non-business and no tax is recoverable in respect of it.

For VAT purposes ‘salary sacrifice’ has a very narrow and specific meaning. It describes an arrangement where an employee opts to receive services and forgoes part of their salary in return. The employee enters into a new employment contract or has their existing contract amended to reflect the new arrangement which they are tied into.

Since the CJEU case of Astra Zeneca UK Ltd v HMRC 2010 (CJEU C-40/09), HMRC’s view is that there is no distinction between salary sacrifice and a deduction from salary in exchange for benefits. If the benefit is a taxable supply, the employer may reclaim input tax and must pay output tax on the value of the salary exchanged by the employee.


Motor Cars

Most businesses are prevented from recovering VAT in full on the purchase and leasing of company motor cars. The input tax block on cars (100 per cent on purchases and 50 per cent on leasing) means that employers do not account for output tax when cars are made available to employees. Where VAT recovery is restricted and output VAT is not due the judgment has no direct impact. Where an employer suffers no input tax restriction, output tax remains due.