Salary sacrifice arrangements in the public and private sector are under the spotlight after a high-profile court case and concerns around their impact on pensions.

The minutes of a Healthcare Financial Management Association (HFMA) meeting in January, seen by Fleet News, suggests there will be “no salary sacrifice schemes beyond April 2015 in the NHS”.

“It was presumed that this was because of pension changes being introduced in April 2015,” the minutes continued. “NHS bodies should consider the way the schemes are communicated to employees to limit the risk of challenge in the future from employees that receive a reduced pension due to being in a salary sacrifice scheme.”

Paul Briddock, director of policy at HFMA, told Fleet News that VAT guidance to Government departments stated that salary sacrifice schemes should be related only to cycle and childcare vouchers, but he acknowledged different trusts do offer different schemes

He added: “We understand that there may be some changes to salary sacrifice schemes in the future, but are awaiting clarification as to whether that is the case.”

The issue is understood to have been brought to a head because NHS employees will see their pension change from a final salary scheme to an average earnings scheme from April 2015.

Alastair Kendrick, a tax expert at MHA MacIntyre Hudson, said: “There are two potential issues.

“Firstly, the Government is concerned that its departments do not get involved in tax planning, which is what they consider salary sacrifice to be. 

“However, it is not clear whether this means they should not entertain this going forward, but also cancel current arrangements.

“Secondly, with changes in the pension arrangements in the NHS taking effect from April 2015 there seems there will be a policy to say pension contributions cannot be impacted by salary sacrifice arrangements. 

“The current pension is final salary, so if a salary sacrifice is subject to taking a pension at or near retirement it does not impact on the employees’ pension. The loser is the Government purse which gets less pension contributions to meet pensions it must pay.”

Mark Morton, a director at Ernst and Young, told delegates at the Fleet News salary sacrifice seminar that the effect on pensions was an issue for the NHS.

He added: “I don’t think it will be the case where they prevent salary sacrifice for cars, but part of the difficulty they’re experiencing is down to the VAT treatment.”

HMRC has issued proposals to try to resolve the VAT position of salary sacrifice for cars, especially after significant growth in the NHS over the past few years.

Tusker, which was initially appointed three years ago to provide lease and salary sacrifice cars to NHS Trusts, was recently re-appointed by the NHS North of England Commercial Procurement Collaborative (NOE CPC).

During that time, it says it has supplied almost 4,000 cars through business lease and salary sacrifice schemes to NHS Trusts all over the UK.

A Department of Health spokesman said: “We are looking at how we can make the system fairer for the taxpayer and staff.”

Meanwhile, one of the UK’s largest employment agencies, Reed, has been found liable for up to £158 million of unpaid tax from a salary sacrifice scheme. Reed made daily payments to cover lunch and commuting to around 500,000 temporary workers between 1998 and 2006, which they maintained was part of a salary sacrifice arrangement.  

However, the Upper Tribunal of the Tax Chamber has backed an earlier judgment which found that Pay As You Earn (PAYE) and National Insurance Contributions (NICs) should have been paid on the entirety of Reed’s employed temps’ salaries between 1998 and 2006. The potential total includes interest on the tax and NICs due.

Over the eight-year period, Reed described part of the salary earned by its employed temps as expenses for travel to work that were paid without making deductions for PAYE and NICs.

Reed had argued that, because HM Revenue and Customs (HMRC) originally allowed these arrangements, the employer could not now be expected to pay any PAYE and NICs due on the expense reimbursements.

However, the Upper Tribunal has now endorsed an earlier First-tier Tribunal Judgement, which found that the expense payments were part of the employed temps’ ordinary salary payments and, as such, PAYE and NICs were due on them.

It also found that, when HMRC originally considered Reed’s arrangements, it had not been given a full picture by the company of how they worked.

Kendrick said: “This is a reminder of the dangers of not ensuring a salary sacrifice scheme is properly structured. It is also a reminder that obtaining an HMRC dispensation is not a protection against HMRC seeking a retrospective claim if the scheme does not fully conform to terms of original agreement.” 

John Messore, partner and director of Innovation Professional Services, is also concerned that other companies could fall foul of HMRC rules by employing similar schemes.

He said: “I have seen examples recently of at least four different leading suppliers from different industry sectors supplying schemes not dissimilar to that purchased by Reed.

“Having seen the documentation I can say without hesitation that in my opinion and 30 years of experience, those arrangements are also flawed.

“Those companies have taken a risk and it is only a matter of time before one of them could be audited by HMRC.”

• Take part in the next Fleet News salary sacrifice seminar on May 13 at Cranage Hall, Cheshire. Email nicola.baxter@bauermedia.co.uk for more information.