The recent interpretation by HM Revenue & Customs (HMRC) of a ruling in the European Courts involving VAT on retail vouchers does not materially affect the tax treatment of cars provided under salary sacrifice car schemes, but could leave some schemes exposed.

The HMRC interpretation, which comes into effect next January, will cause issues for schemes that aren’t properly structured and companies are urged to tread carefully as a result.

The provision of company cars via salary sacrifice will not be impacted by the HMRC guidance provided VAT recovery is restricted, either by 50% or 100%, and output VAT is not due.

This was also the view taken by the British Vehicle Rental and Leasing Association, the leasing industry umbrella body.

However, it is now essential that employers select a salary sacrifice provider with the appropriate experience and expertise to avoid the pitfalls this interpretation now throws up.

It’s also imperative that any salary sacrifice car arrangements should be reviewed in their entirety to ensure all the constituent elements – for example, maintenance – are correctly treated.

The new rules only apply to salary sacrifice arrangements where it is perceived that employees are buying or paying for benefits or services from their employer, such as retail vouchers.

This is clearly not the case with a company car provided via a properly structured salary sacrifice scheme.

Take the example of an employee who starts with an annual salary of £30,000 and assume that the annual equivalent salary sacrifice for a car is £4,000.

The employee is still paid £30,000 but gets £26,000 in cash and £4,000 by way of the right to the loan or bailment of the company car as a benefit in kind.

The employer is “paying” £30,000 to the employee as consideration for the employee’s services under the employment contract and does not involve a “payment” by the employee.

In fact, far from being a “payment” by the employee, the amount of the salary sacrifice is still actually a receipt by the employee.

It is consideration in kind – the bailment or loan of the car to the employee in return for his or her services under the employment contract – and therefore does not fall foul of the new HMRC interpretation.