Fleets are being warned that the interpretation by Her Majesty’s Revenue and Customs (HMRC) of a Court of Justice of the European Union (CJEU) ruling could have an impact on salary sacrifice for company car schemes.

The CJEU ruled in favour of HMRC requiring Astra Zeneca to account for VAT on the salary sacrificed by its employees for retail vouchers, in August 2010.

However, HMRC has only now issued advice on what the CJEU ruling will mean for employers supplying benefits, including company cars, to employees through salary sacrifice schemes.

Nathan Male, director, Deloitte Car Consulting, said: “In essence we believe the position is there is going to be a cost implication for employers operating company car salary sacrifice schemes. We are currently digesting the guidance.”

Astra Zeneca operated a flexible remuneration package scheme under which employees could opt to take part of their remuneration in the form of high street shopping vouchers rather than as salary.

The case before the CJEU concerned the correct VAT treatment of these vouchers, which were made available to employees as one of the options of the scheme.

The court found that “the provision of vouchers amounted to a supply of services effected for consideration”.

As a consequence, whilst Astra Zeneca was able to recover VAT incurred on acquiring the vouchers, output tax was due on the consideration received from its employees.

Although this case was concerned with the supply of vouchers to employees, HMRC says that the principles considered by the court are of general application and will apply to other supplies of goods and services to employees.

Guidance released by HMRC late last week stated that businesses providing benefits under arrangements, which qualify as salary sacrifice schemes for VAT purposes, must account for output VAT on these supplies, where they are subject to VAT.

HMRC guidance provides details of the effect of the ruling on many of the popular benefits made available to employees via salary sacrifice schemes, including company cars.

Male continued: “Depending on the structure of the scheme in question the VAT treatment may change. If this is the case an additional VAT cost will need to be factored into an employee’s salary sacrifice if employers do not wish to take on this cost.

“We are looking at the potential opportunities for employers to manage these costs. For correctly structured schemes we do not believe this ruling is going to make salary sacrifice for company cars not a viable option for employers.

“The ruling does, however, further demonstrate the need for employers operating these arrangements to have full visibility of both the commercial and taxation costs of operating a company car salary sacrifice scheme.”

However, the chief executive of the BVRLA John  Lewis told Fleet News that salary sacrifice car schemes are typically based on an underlying leasing agreement between an employer and a leasing company.

"The HMRC guidance on salary sacrifice schemes clearly states that the European Court of Justice ruling will have no impact on the leasing of company cars," he said. "This is because employer VAT recovery on leasing of cars is already restricted.

"However, a question mark remains over how the ruling will impact any maintenance agreement included as part of the lease.

"HMRC is currently unable to clarify this issue, but we will keep the industry informed of any further guidance when we receive it.”

The new guidance will become effective from January 1, 2012.

See the August 18th edition of Fleet News for further analysis and what it will mean for fleets.

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