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HMRC internal manual

VAT Supply and Consideration

Consideration - Payments that are Consideration: What is the VAT status of payments deduction from salary?

Where deductions are made from salary for goods or services provided by an employer to their employees they are liable for VAT. The remuneration an employee forgoes is consideration for the taxable benefits provided and output VAT will be due from and input VAT recoverable by the employer in accordance with the normal rules.



Before the CJEU judgment in Astra Zeneca (Case C-40/09) our policy was to distinguish between the VAT treatment of supplies of goods and services paid for by employees under:

  • Deduction from salary - where an amount is deducted from an employee’s pay in return for a supply of goods or services by the employer. Output tax is due on the amount deducted from the employee’s salary and input tax recoverable in accordance with the normal rules.


  • Reduction in salary (often referred to as salary sacrifice) - for VAT purposes “salary sacrifice” describes an arrangement where an employee opts to receive optional benefits provided by the employer and forgoes part of their salary in return.   Employees who choose to take a benefit have their employment contracts amended (or enter into new contracts) to reflect the new arrangements.


  • Implementation of revised policy

      In order to allow businesses time to implement the Astra Zeneca judgment HMRC introduced the following transitional rules:

i           For salary sacrifice agreements in place (signed or otherwise agreed) before Revenue and Customs Brief 28/11 announcing the change was issued on 28 July 2011 and which extend beyond 31 December 2011, employers do not have to account for VAT on salary sacrifice payments until:

  • The date that a fixed term agreement expires or the fixed number of salary sacrifice payments specified within the agreement are completed (if the agreement expired before 1 January 2012 any agreement subsequently entered into should follow the VAT treatment described in section ii below); or
  • The date of an employee’s annual salary/benefits review. Any salary sacrifice arrangements put in place after that date was a new agreement which should follow the treatment described in section ii below. This is the case even if the employee continued to receive the same taxable benefits as before the review; or
  • The date of any other review or renegotiation that led to a change in the provision of benefits under a salary sacrifice agreement or to a change in an employment contract. Following one of the above events VAT is due on any taxable benefits provided on or after 1 January 2012 by way of salary sacrifice.

ii           For salary sacrifice agreements entered into on or after 28 July 2011, employers must account for VAT on amounts of salary foregone in return for taxable benefits from 1 January 2012.


Valuation of benefits provided

In most cases the value of the benefit for VAT purposes will be the same as the salary deducted or foregone. Where the true value is not reflected, for example where benefits are supplied below what it cost to acquire them, the value should be based on the cost to the employer.


Purchase of item by employee

Where an employee chooses to purchase an item at the end of the salary sacrifice arrangement, such as a computer, or a bicycle provided under a Cycle to Work Scheme, the consideration given for the supply of the goods at that time will be taxable (subject to any special rules affecting particular goods such as cars).