Court ruling puts salary sacrifice under the spotlight

A recent European Court of Justice ruling has raised fears about the future of salary sacrifice schemes.

Salary sacrifice schemes are offered to employees so they can obtain items such as childcare vouchers, bicycles for work and retail vouchers, at a lower cost than if they bought them in the usual way.

For example, it is currently financially advantageous for employees to obtain low-emission cars under salary sacrifice schemes thanks to National Insurance and income tax savings.

Many companies now offer salary sacrifice schemes to their employees.

And a recent trend has been identified where companies are replacing their company car fleet with one entirely made up of salary sacrifice cars (see this week's issue of Fleet News for more on this story).

But now the ECJ has ruled in favour of HMRC requiring the defendant - AstraZeneca - to account for VAT on the salary sacrificed by its employees for retail vouchers.

There is a now a fear that the ECJ ruling could be applied by HMRC on all salary sacrifice schemes including cars supplied through such schemes.

However, the current consensus of expert opinion is that it is unlikely – although not impossible – that HMRC will apply the ruling to all salary sacrifice schemes.

HMRC is expected to confirm how it will interpret the ruling in the autumn.