Following a ruling by the European Courts, HMRC has issued new guidance on the way in which employers should treat VAT for salary sacrifice arrangements. Although the court ruling was in respect of high-street vouchers rather than childcare vouchers, there may still be implications for employers who run a childcare voucher scheme.

The new guidance suggests that employers who operate a salary sacrifice arrangement are now deemed to be “selling” childcare vouchers to their staff. As childcare is VAT exempt, the VAT on our administration fee will be considered as relating to a VAT exempt sale. This means that some employers will no longer be able to reclaim the VAT on our administration fee. There may also be secondary implications on other parts of their VAT calculations.

However, a number of questions remain unanswered, including whether employers can use the rules surrounding agency relationships to invoke an exemption. The argument in this case would be that the employer is not actually providing a VAT exempt service, but is merely acting as an agent of the employee by paying a childcare provider in accordance with the employee’s instructions. We are currently seeking clarification on this and will be providing clients with guidance in due course.

Iain McMath, managing director of Sodexo Motivation Solutions, one of the top childcare voucher providers comments on the news that companies will no longer be able to claim back the VAT on their childcare voucher scheme administration charges:

“Currently, if you run a childcare voucher scheme for your employees, you are able to claim back the 20% VAT which is incurred from the management fee charged by the provider. From January 2012, an EU ruling means this will not be possible. However, as childcare vouchers are exempt from tax and National Insurance, the change to VAT rules, has a minimal impact on the overall value and success of the scheme.”