The following sets out how to properly account for VAT on cycle to work schemes from January 2012, plus some further commentary on the difficulties surrounding lease car schemes.
General Rules
HMRC Brief 28/11 stated that deductions under salary sacrifice schemes would become subject to VAT where applicable from the 1st January 2012.
Trusts already providing bicycles or cars outside of a salary sacrifice arrangement are not affected, as payments received from employees were already subject to VAT and continue to be so.
The subsequent HMRC Brief 36/11 outlined some transitional rules which meant that not all salary sacrifice schemes became automatically taxable from January.
To summarise the transitional rules:
- VAT must be accounted from 1 January 2012 on agreements in place which were entered into from 28 July 2011.
- Agreements that were signed or otherwise agreed by the parties on or before 27 July 2011 and which extended beyond 31 December 2011, will continue to be free of VAT until:
- The date that a fixed term agreement expires or the fixed number of salary sacrifice payments specified within the agreement are completed (if the agreement expired before 1 January 2012, any agreement subsequently entered into should be treated as subject to VAT).
- The date of an employee’s annual salary/benefits review. HMRC will regard any salary sacrifice arrangements put in place after that date as a new agreement for VAT purposes. This will be the case even if the employee continues to receive the same taxable benefits as before the review.
- The date of any other review or renegotiation that leads to a change in the provision of benefits under a salary sacrifice agreement or to a change in an employment contract.
Following one of the above events VAT will be due on any taxable benefits provided on or after 1 January 2012 by way of salary sacrifice.
Cycle to Work Schemes
In respect of cycle to work schemes, this means that subject to the transitional rules:
- Trusts would need to account for output tax on the value of the salary foregone by participating employees in exchange for the hire or loan of a bicycle.
- Trusts are able to recover VAT as business input tax on the associated hire or loan of goods.
Lease Car Schemes
The changes to the VAT rules affecting lease car schemes are slightly more problematic for pre-existing schemes due to the interaction between the NHS non-business VAT rules and the business VAT rules.
NHS Trusts are able to recover the VAT on the purchase of lease cars, provided with maintenance, under contracted-out services (“COS”) heading 26. COS VAT recovery is however conditional upon the purchase being used for non-business purposes.
As stated previously, where Trusts have charged staff for lease cars outside of a salary sacrifice arrangement, this has always been treated as a business supply with output tax due.
In theory, this means that the VAT incurred on the associated purchase is recoverable as business input tax (rather than COS VAT) at least for the element of private use, however in practice, most Trusts have simply treated this all as COS VAT recovery. To-date, HMRC has never challenged this treatment due to there being no apparent tax loss.
Pre-Existing Schemes
Prior to the changes in the VAT rules, lease car scheme deductions for existing salary sacrifice schemes were outside the scope of VAT (i.e. non-business) with no output tax due. As such, Trusts continued to recover VAT on associated lease costs under the COS rules.
This has meant that in most cases, pre-existing scheme employees have benefitted not only from PAYE and NI savings, but also from a lower cost lease car, due to the amounts sacrificed being net of VAT.
Apart from the transitional rules outlined in HMRC Brief 36/11, most schemes have now become taxable from 1 January 2012. This means that the VAT incurred on the associated lease cost will remain recoverable by the Trust, albeit strictly speaking as business input tax rather than COS VAT.
Because the VAT on pre-existing schemes was already being recovered with the net cost charged to the employee, the output tax now due will be a further cost to either the employee or the Trust. This depends upon whether the charge to the employee can be increased to take account of the VAT under the terms of the agreement.
There are added complications where NHS Trusts have utilised car schemes set up by other NHS bodies, where the recharges between the organisations have been VAT free due to the divisional registration rules. In these circumstances, the NHS body running the scheme is likely to have recovered VAT under the COS rules and charged the net cost onto the employer Trust, which in turn has charged the net cost onto the employee.
We understand that HMRC has referred a paper to HM Treasury concerning the VAT treatment in these circumstances and also whether the normal business 50% VAT restriction on lease cars (applicable to the car but not the maintenance for taxable businesses) has any bearing where cars are made available for personal use.
Until further guidance becomes available, VAT should be declared on the deductions from the employer Trust to employees.