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The VAT rules governing salary sacrifice schemes are set to change with effect from 1 January 2012 as a result of last year’s ECJ case involving Astra Zeneca.
 
Under salary sacrifice schemes, an amount is deducted from an employee's pay in return for benefits, usually in the form of goods and/or services.  Historically the salary deduction has not been viewed as consideration for any supply for VAT purposes and no VAT has therefore been due.  However, the ECJ ruled in the above case that such deductions do constitute consideration for the goods/services provided and that VAT should therefore be applied where appropriate.
 
This means that, with effect from 1 January 2012, employers will be required to account for VAT on the value of VATable goods and services provided under such schemes.  This includes face value vouchers, meals, computers and many other  VATable goods or services provided in return for foregone salary.  VAT will not be due on goods and services that are ordinarily zero rated or exempt, such as nursery care.
 
The amount of salary deducted will ordinarily be taken as the value of the supply for VAT purposes.  There are however some exceptions.  For example, for bicycles provided under the "cycle to work" scheme, the HMRC table which can be used to calculate taxable benefits could be used for valuing the supply for VAT purposes.

As a transitional arrangement, HMRC has agreed that salary sacrifice agreements that were in place before 28 July 2011 and which extend beyond 31 December 2011 may continue to operate under the old rules until the earlier of:

• in the case of a fixed term contract, the end of the contract;
• the date of the employee's annual review; or
• the date of any other review or renegotiation.