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Introduction

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 Salary Sacrifice Schemes allow employees to receive benefits provided by employers by exchanging a reduction in salary for those benefits. From a VAT perspective the forgoing of salary is consideration for a taxable benefit and as such output VAT is due and any associated input VAT is recoverable by the business under the normal rules.  VAT will be payable to HMRC by the employer on the cost of providing these benefits.  

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Types of Salary Sacrafice Benefits - Taxable (20% Output VAT Due)

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• Cycle to Work Scheme

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Under the Cycle to Work Scheme employers purchase bicycles and safety equipment and provide them to employees. Where this is under a salary sacrifice arrangement employers must account for output tax based on the value of the salary foregone by the employee in exchange for the hire or loan of a bicycle.

VAT is due when a bicycle is disposed of and its value should normally be based on the price of an identical or similar item, taking into account the age and condition etc.

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Valuing bicycles has caused difficulties for Scheme operators and therefore, to reduce administration burdens, the table used to value bicycles for direct tax purposes may be used http://www.hmrc.gov.uk/manuals/eimanual/EIM21667a.htm (link is external). Any bicycles that fall outside of the table (such as antique or specialist bicycles) should be valued using the normal VAT valuation rules. If businesses choose to use lower values, they may be challenged in which case evidence will be required to support the valuation.

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• Gym Membership

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Corporate gym memberships where the benefit is optional and not provided free to all employees. Output VAT is due on cost of the membership.

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• Face Value Vouchers

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Where vouchers, such as those available from high street retailers, are provided under a salary sacrifice arrangement (as defined above) input tax may be claimed and output tax is due on the consideration paid by the employee.

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• Car Parking

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Car parking provided to employees near their place of work where an amount is deducted from their salary is taxable (standard rated) and output VAT is due on the cost of the parking. Any input VAT incurred by the Employer can be recovered under the normal VAT recovery rules.

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• Computers, Technology, Mobiles

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Computers and laptops, phones or other peripherals  provided to employees via salary sacrifice for personal use are also taxable and output VAT is due on their supply.  

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• Food and Catering Provided to Employees 

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Food and catering provided to employees under a salary sacrifice scheme will be taxable under the normal catering rules. VAT payable on taxable supplies of catering. No output VAT payable on items that are zero rated.

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Types of Salary Sacrifice Benefits - Non Taxable (No Output VAT Due)

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In addition to salary sacrifice benefits that are taxable at the standard rate (employer pays), there are salary sacrifice benefits where forgoing salary is not considered as consideration for receiving benefits and as such Output VAT is not payable by the employer when provided to employees. Some of these are listed below.

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• Child Care Vouchers - Salary forgone to a third party for childcare support

• Free Food and catering (available to all staff)​

• Workplace gym available to all employees where employees are not charged for using it.

• Health Insurance

• Dental Insurance

• Others