We intend to look at the tax treatment of salary sacrifice arrangements more generally in next month’s edition, but this month we consider the recent judgment of the European Court of Justice (“ECJ”) in Astra Zeneca UK Ltd v. HMRC (C-40/09). The case deals with the VAT treatment of retail vouchers provided by Astra Zeneca (AZ) to its employees as part of a flexible benefits arrangement, and is of potential relevance to all employers who make salary sacrifice arrangements available to their employees.


AZ offered its employees a “traditional” salary sacrifice arrangement, whereby employees had the choice to sacrifice a proportion of their overall salary to obtain certain benefits.  Among the benefits offered were retail vouchers to be used in certain shops. The vouchers had a nominal value of £10, but the salary sacrifice was of a discounted amount (between £9.25 and £9.55) reflecting the value at which AZ could purchase the vouchers from an intermediary.

Initially, AZ did not account for VAT on the provision of those vouchers to its employees (“output VAT”), nor did it seek to recover the VAT which it had incurred on purchasing the vouchers (“input VAT”).

Subsequently, AZ claimed that as the cost of acquiring the vouchers was a business overhead it ought to be entitled to deduct the input VAT. Further, as the vouchers were not provided for any consideration for VAT purposes, the company did not need to charge output VAT on the provision of the vouchers to its employees. The net effect of this would have been to allow AZ to reclaim the full amount of the VAT it incurred on the vouchers.

HMRC refused the treatment sought by AZ arguing that either:

  • AZ was not entitled to deduct the input VAT paid on the purchase of the vouchers, since providing those vouchers to employees did not constitute a transaction subject to VAT; or
  • AZ was entitled to deduct the input VAT paid in acquiring the retail vouchers, but that it was also required to account for the output VAT on the provision of those vouchers to its employees.

The second argument above seemingly being in contrast to HMRC’s long standing policy that salary sacrifices do not constitute consideration for the provision of the relevant benefits.

AZ appealed against HMRC’s decision to the VAT and Duties Tribunal (now the First-Tier Tribunal) and the Tribunal decided to refer a number of questions to the ECJ for its determination.

In its decision, the ECJ found that for VAT purposes the provision of retail vouchers by AZ to its employees was a supply of services and the part of the cash remuneration which the employees had to forego in order to receive the vouchers constituted consideration for that supply.  Accordingly they upheld the second argument put forward by HMRC above.


The judgment of the ECJ would appear to be broad enough to apply to other benefits provided to an employee as part of a salary sacrifice or flexible benefits arrangement, to the extent that such benefits consist of goods or services which would normally be within the scope of VAT.

HMRC have not yet issued guidance on the ECJ’s judgment in AZ, or on how it plans to apply the decision more generally to salary sacrifice arrangements (past and present) given its previous advice.  Such guidance is eagerly awaited by both practitioners and their clients.

In the meantime:

  • the VAT implications of all existing and future planned flexible benefits and salary sacrifice arrangements should be reviewed;
  • in principle, other salary sacrifice arrangements, such as the cycle to work and bus arrangements could be affected – depending upon the benefit at issue and the underlying contractual arrangements;
  • one of the more widely available salary sacrifice arrangements, additional employer pension contributions, should not, however, be impacted. And we would also expect the purchase of additional holiday entitlement to remain unaffected;
  • looking narrowly at retail voucher arrangements, HMRC can now assess employers for the output tax on the provision of such vouchers to employees. Depending on the precise terms of the arrangements (and in particular whether employers have passed on the full benefit of any discount on purchase of the vouchers to their employees), this could result in a net payment to HMRC;
  • if HMRC do attempt to seek payment of amounts (plus interest and penalties) based on the Astra Zeneca decision, taxpayers who have relied in the past on HMRC’s long standing policy referred to above should consider what rights they have to resist such payment;
  • whilst the Astra Zeneca decision does give rise to additional complexities, in principle salary sacrifice/flexible remuneration packages do continue to provide tax efficient benefits to employees.

 Emma Bailey is a partner and Jaspal Pachu an Associate both specialising in tax at Fox Williams LLP.  They can be contacted on ebailey@foxwilliams.com and jpachu@foxwilliams.com

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