Employers need to carefully consider the cost implications of providing benefits in kind to employees following the introduction of VAT on several benefits offered via salary sacrifice from 1 January 2012.
Additional costs for employers
As a result of a recent decision made by the European Court of Justice, with effect from 1 January 2012 employers will incur additional costs due to VAT being imposed on certain benefits provided under a salary sacrifice arrangement. This change will not affect employees who have salary sacrifice agreements that were signed or otherwise agreed on or before 27 July 2011. However it will apply from the date when an employee’s benefits or contractual terms change.
The change does not apply to benefits which are exempt from VAT such as private medical insurance and dental plans, pension contributions and company cars. Childcare vouchers are also exempt from VAT. However, it may now not be possible to recover all of the VAT charged relating to administrative expenses incurred by the employer in providing the vouchers.
Employers should review their employee benefit packages and consider whether they should bear the additional costs or pass them on to their employees.