Astra Zeneca: Supplies of vouchers to employees

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13 September 2010

On 29 July 2010 the European Court of Justice (the "ECJ") released its judgement in the Astra Zeneca litigation which sought to clarify the VAT treatment of staff vouchers used in salary sacrifice schemes.  The ECJ ruled that the employing company must account for tax when making vouchers available to employees.


The litigation surrounded the VAT treatment of retail vouchers made available by Astra Zeneca to their employees under their 'Advantage Fund' arrangements.


Astra Zeneca completed its VAT returns on the basis that it was not required to charge output VAT on the provision of the vouchers and that it was not entitled to deduct as input VAT the VAT which it had paid in purchasing the vouchers.


However, Astra Zeneca subsequently claimed that as the cost of acquiring the vouchers was a business overhead, it ought to be entitled to deduct the VAT resulting from that acquisition and not to charge output VAT on the provision of the vouchers at issue to its employees, on the grounds that they were not provided for consideration.


Consequently Astra Zeneca made protective claims from HMRC for a reimbursement of the input VAT which it had incurred in respect of the acquisition of the retail vouchers.


HMRC refused Astra Zeneca's claims on the grounds that Astra Zeneca did not use the vouchers for any taxable transactions. 


In the alternative HMRC argued that if Astra Zeneca were to be able to recover input VAT, it would have to account for output VAT on the supplies of the vouchers to its employees on the grounds that either the vouchers were provided for consideration (since a deduction was made from the employee's Fund) or the vouchers were made available to the employees for the purposes other than business purposes.  In this later case, since the value of the supply of services corresponded to the cost of providing the retail vouchers, Astra Zeneca was required to account for the output VAT on that amount.


Having considered the issued raised, the Manchester VAT and Duties Tribunal stayed proceedings and referred a number of questions to the ECJ for a preliminary ruling.


Principally, the tribunal asked whether, in the circumstances of this case, where an employee is entitled under the terms of his or her contract of employment to opt to take part of his or her remuneration as a face value voucher, Article 2(1) of the Sixth Directive is to be interpreted such that the provision of that voucher by the employer to the employee constitutes a supply of services for consideration?


The ECJ held that by including amongst the taxable transactions defined in Article 2 of the Sixth Directive not only the importation of goods but also the supply of goods or services for consideration within a territory of a country and by defining 'taxable person' in Article 4(1) of the Sixth Directive as any person who independently carries out an economic activity, whatever the purpose or results of that activity, the Sixth Directive attributes VAT a very wide scope and the transaction at issue therefore constitutes a supply of services effected for consideration within the meaning of Article 2(1) of the Sixth Directive.


Article 2(1) of the Sixth Directive must therefore be interpreted as meaning that the provision of a retail voucher by a company, which acquired that voucher at a price including VAT, to its employees in exchange for their giving up part of their cash remuneration constitutes a supply of services effected for consideration within the meaning of that provision.


Historically, HMRC have not imposed output VAT on benefits provided to employees under salary sacrifice arrangements even when the employer has reclaimed input VAT on the purchase of the benefits.


Following the decision of the ECJ in this case, HMRC will not be able to ignore the VAT consequences of salary sacrifice arrangements going forwards and HMRC will therefore need to review how they deal with such schemes.


In practice, it will only be employers who have reclaimed input VAT but not accounted for output VAT that will be vulnerable to retrospective HMRC actions.  Employers who have not reclaimed input VAT should not be at risk as to the extent that HMRC pursue an output VAT claim, the employer should be able to recover the corresponding input VAT so the effect should be neutral.


Employers who operate salary sacrifice arrangements should review their schemes urgently to check the VAT ramifications.


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