Changes to the VAT treatment of salary sacrifice schemes have been announced by HMRC. The changes are effective from 1 January 2012 and in some cases will increase the overall cost of the scheme.
Salary sacrifice schemes allow employees to forgo part of their salary in return for a benefit. This was initially used for pension contributions but has been extended to include bikes, childcare, vouchers, mobile phones and travel season tickets.
From 1 January 2012 employers providing such benefits must account for VAT on benefits that are subject to VAT. Remember that childcare is exempt from VAT and the supply of childcare vouchers will not be affected.
HMRC have stated that the change is limited to VAT and there is no change to the direct tax treatment of the schemes. Any VAT incurred by the employer obtaining the benefits will be recoverable in full, where it results in a VATable supply. Some organisations will not be able to recover all of this VAT.