Optional remuneration arrangements: the VAT considerations

Supplying employees

If the employer is VAT registered they must charge VAT on all sales unless whatever is being supplied is exempt or outside the scope of VAT. This applies to all customers, including employees. With a few exceptions, the amount on which VAT is payable is the value of “consideration” given for the goods or services supplied. Usually that’s the amount paid by the customer but where the supply is made as part of an optional remuneration arrangement (OpRA) it can be different.

Consideration in return for a supply

Consideration doesn’t just mean cash payments, it can include something with a monetary value. For many years it was unclear to what extent the monetary value of a salary sacrifice (a type of OpRA) by an employee counted as consideration. In 2010, following a decision of the Court of Justice of the European Union, the argument was settled in HMRC’s favour.

Optional remuneration arrangements

A salary sacrifice is where an employee forgoes part of their salary in return for a benefit in kind from their employer. The employee enters into a new employment contract, or the existing contract is amended to reflect the lower salary. The consideration (for VAT purposes) for receiving the benefit is the amount of salary given up by the employee.

The consideration for the supply of the benefit is normally equal to the amount of salary forgone. But if this is less than the true value of the benefit, say, where the salary sacrificed is less than the cost to the employer of providing the benefit, the VATable amount is that cost.

This doesn’t mean that every salary sacrifice triggers a VAT liability. If the benefit given to an employee in exchange for a salary sacrifice is exempt from VAT, e.g. medical insurance or an interest-free loan, there’s no VAT. Similarly, if the benefit is zero-rated there’s no VAT cost, but it must be included as turnover on the VAT return.

HMRC’s view

HMRC has published its view on certain benefits provided under OpRAs where it considers the VAT position needs clarification.

Cycle-to-work scheme. For bikes and safety equipment loaned to employees, the employer must account for VAT at the standard rate on the salary sacrificed. They can recover VAT on the purchase of the bike and equipment. If they transfer ownership of the bike to the employee, VAT is payable on the consideration. The employer can use HMRC’s valuation of bikes for income tax valuation for VAT purposes.

Face value vouchers. The employer must account for VAT on the salary sacrificed but can recover input tax (if any is paid) on the purchase of the vouchers.

Childcare vouchers. The vouchers themselves are exempt from VAT which means there’s nothing to account for. Any VAT paid in obtaining the vouchers (typically, this will only be where the employer buys the vouchers through an agency) can be reclaimed subject to partial exemption restriction.

Food etc. The employer must account for VAT at the appropriate rate on the salary sacrificed where the food is provided and consumed in a canteen. Food can be zero-rated, e.g. where it is not heated and taken away. They can reclaim any VAT paid on purchases of food whether the supply is standard or zero-rated.