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Salary Sacrifice Vat Changes

From 1st January 2012, new rules have come into force on VAT treatment of certain benefits provided under a salary sacrifice scheme.

After a ruling in the European Court of Justice, an employer, operating a salary sacrifice scheme, must pay “output” tax on the pay given up by employees.

Output tax, which is the VAT charged when a benefit is supplied to the employee (if the benefit is subject to tax) will have to be accounted for by employers.

These rules apply from 01/01/12 however, salary sacrifice agreements that were made on or before 27/07/11 will continue to be free of VAT until the earliest of the following:

 The date that a fixed-term agreement expires or the fixed number of salary-sacrifice payments specified within the agreement are completed;

The date of an employee’s annual salary or benefits review;

The date of any other review or renegotiation that leads to a change in the provisions of benefits under a salary-sacrifice agreement or to a change  in an employement contract.  

Childcare vouchers are not subject to VAT so are not directly affected by this ruling; however, employers that previously recovered VAT on the administration fees from the voucher provider may not be allowed to do so as these fees are directly attributable to the exempt vouchers.

Other areas that will be affected will be organisations that purchase/lease vehicles to their employees.  Most employers are preventing from recovering VAT on the purchase or leasing of cars, in this case they will not have to account for output tax. However, if there is no input tax restriction in place, output tax will need to be accounted for. 

This also applies to employers that provide bicycles and safety equipment under a salary sacrifice arrangement to their employees; They can still recover VAT on the purchase of bicycles and related equipment.

If we can be of further help or if you would like to discuss any aspect of these changes, please contact us at

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