Astra Zeneca and Employee Benefits: Last year’s ECJ decision in the case of Astra Zeneca UK Limited (“AZUL”) got a lot of people in the VAT world terribly excited. It seemed to me that the decision was correct within the meaning of both EC and UK VAT legislation, but I appreciate that it could have a significant cost implication for those employers who have provided discounted retail vouchers to their employees without accounting for output tax over the years.
The decision was important because it confirmed the principal that where an employee gives up part of his cash remuneration in return for a supply of goods or services which in themselves are liable to VAT, this represents a supply by the employer to the employee for a consideration. It means that the employer can recover as input tax the VAT paid on the purchase of the goods or services concerned, but must account for output tax on the cash value of the salary “sacrifice”.
VAT and employee benefits
VAT and employee benefits have always been a real bone of contention between HMRC and businesses. Over the years, we’ve had potential issues arising from staff discounts and company cars, which are really the obvious ones. More recently, things have become a bit more interesting as most large private sector employers have introduced different types of “flexible benefit” remuneration packages that enable employees to choose from a wide range of goods and, mostly, services.
I’m sure that you’re all familiar with the concept – each employee has a remuneration “pot” which can be taken in form of a basic cash salary and minimum holiday entitlement, or varied to include a smaller cash salary and a range of other benefits, which are usually provided at a discounted “price”. These include various types of insurance, such as medical or dental insurance, childcare vouchers, goods such as bicycles, personal computers and various types of retail vouchers.
The AZUL judgement was very important in that it established, beyond any doubt, how VAT should be applied on transactions between employer and employee.
The facts
AZUL provided such retail vouchers as part of their staff remuneration scheme. In the particular case, employees could opt to receive vouchers with a face value of £10, although the cost to the employer was between £9.25 and £9.55, representing a discount of between 4.5% and 7.5% to the employee.
Under normal VAT rules, businesses who buy and sell retail vouchers, can claim the VAT paid on their purchase but must account for output tax when the vouchers are “sold”. The sale of the vouchers is regarded as a supply of services as it entitles the purchaser, in this case the employee, the right to purchase goods for the face value of the voucher from the retailer concerned.
HMRC believed that AZUL could recover as input tax the VAT paid on the purchase of the voucher, but should have accounted for output tax on the supply to its employees. This would basically mean that the correct VAT accounting would be neutral for the company, ie the input tax and output tax would be equal.
What actually happened was that AZUL didn’t do either, but submitted a claim for input tax on the purchase of the vouchers, but didn’t account for output tax, arguing that giving the vouchers to staff weren’t liable to VAT as transactions between employers and employees don’t represent supplies for VAT purposes. Their position was that the provision of the vouchers to the employees meant that the vouchers were used for a business purpose so there was no liability to output tax.. In essence, that giving the vouchers to the staff in return for a salary sacrifice meant that the vouchers were “consumed” by the business and there was no supply to the employee.
The relationship between employer and employee and whether there is a supply for VAT purposes
The key issue, as far as I’m concerned, was that AZUL argued that the provision of employee benefits represented use by the business and therefore there was no liability to output tax. This goes back to teh very fundamentals of VAT and the nature of the relationship between the parties involved. And the ECJ judgement – which at just 6 pages is one of the shortest and most readable – dealt with the issue by answering the first in a list of questions which were referred by the Tribunal:
In the circumstances of this case, where an employee is entitled under the terms of his or her contract of employment to op to take part of his or her remuneration as a face value voucher, is Article 2 of the [Sixth Directive} … to be interpreted such that the provision of that voucher by the employer to the employee constitutes a supply of services for consideration?
Article 2 deals with one of the most fundamental of VAT issues, ie it defines the term “supply” for VAT purposes, while Article 4 of the Directive defines the term “taxable person”.
Based on these fundamental principles, the ECJ had no hesitation in supporting HMRC’s view that the provision of the vouchers in return for a salary sacrifice represented a supply for a consideration which was liable to VAT. The vouchers were not used in the business, but represented a supply of services from AZUL to its employees for their personal use.
What it means for supplies by an employer to an employee
And that’s the important point of AZUL – it confirms that when it comes to the provision of goods or services for personal use, the employer and employee are treated as separate legal entities.
It doesn’t affect the employer/employee relationship in so far as the employee is contracted to provide services, ie whenever an employee enters into a contract of employment, the employee and the employer enter into a relationship whereby in return for a salary, the employee is paid by the employer for providing his time and presence working in the employer’s business. Paid employment is not a business activity, so the salary does not represent consideration for a supply by the employee to the employer.
However, the provision of goods and/or services by the employer to the employee for non-business, i.e. personal, use in return for a proportion of the salary does represent a supply for VAT purposes. Such transactions between the employer and employee are liable to VAT in the same way as transactions between any two separate entities.
So the judgement of the ECJ doesn’t come as a surprise to me. It simply confirms HMRC’s longheld viewpoint that wherever a business puts taxable goods or services to non-business use, any consideration that is charged for such use is liable to VAT. It does close another avenue for VAT planning but I don’t think it comes as any surprise.
The ruling doesn’t affect the position of those benefits which are either available to all employees for no “charge”, or the VAT treatment of benefits which are “purchased” but are exempt from VAT or zero-rated, such as health insurance or nursery vouchers. But employers are advised to review their employee remuneration packages to see if they have any liability on positive rated supplies made to employees that should be disclosed to HMRC.