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ECJ judgment clarifies VAT treatment of staff vouchers

29 July 2010

The European Court of Justice (ECJ) has issued its judgment today in the Astra Zeneca litigation providing clarity in a complex area of VAT relating to retail vouchers and salary sacrifice arrangements. The result of this important judgment means many businesses could face significant VAT assessments if they have recovered VAT on retail vouchers which they provide to staff as part of a salary sacrifice scheme, but have not accounted for VAT on their supply.

The case, which was referred to the ECJ by the UK Tax Tribunal, involves the VAT treatment of retail vouchers supplied to employees as part of a salary sacrifice scheme. UK legislation requires intermediaries who procure discount retail vouchers for large employers to charge VAT. Often businesses will recover the VAT which they are charged but may not account for any output tax when they pass the vouchers on to staff.

The ECJ, following the view of the Advocate General, has ruled that employers may recover VAT when it is charged to them on retail vouchers, but must account for VAT when they provide retail vouchers to their staff as part of a salary sacrifice scheme. This should result in a nil VAT burden for employers, where they simply pass on to staff the cost of the vouchers including VAT.

Giles Salmond, a director in the Deloitte tax dispute resolution group, who advised Astra Zeneca in this litigation at the ECJ, stated: “This is a significant case looking at the complex tax treatment of vouchers and salary sacrifice schemes. Large employers which use retail vouchers as part of any salary sacrifice arrangement for staff may now have to revisit how they deal with the VAT accounting on these vouchers.”

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