VAT on Salary Sacrifice Schemes

Salary sacrifice schemes are often used by employers to give their employees vouchers as part of their salary. Common examples include vouchers for childcare or bicycles and cycling equipment. The European Court of Justice (ECJ) has recently ruled that drugs giant AstraZeneca should pay VAT on retail vouchers provided to staff as part of their salary. AstraZeneca attempted to claim back the VAT it paid on the purchase of the vouchers and also sought to avoid having to pay VAT when distributing the vouchers to employees. HMRC disagreed and the ECJ found in favour of HMRC. The ECJ’s reasoning was that the salary sacrificed by the employees constituted ‘payment’ for a supply by the employer to the employee.

Tax experts warn that the decision could have significant consequences for employers who operate such schemes. Significant VAT assessments could arise for businesses who have recovered VAT on retail vouchers but have not accounted for the VAT on the supply of the vouchers. Some warn that HMRC could seek to recover tax due over the past four years costing employers in the region of £500m. It is also forecast that the decision could cost employers £100m per year in the future. Advisers warn that the decision could result in taxation of other benefits such as mobile phones and computers.

Businesses which operate salary sacrifice schemes would be wise to review the VAT treatment of benefits on offer to employees to ensure that they comply with the decision.

Simon Allison, Associate
Employment Law

Employees buy fake ‘fit notes’ online

Whilst employers are adapting to the new “fit note” introduced in April 2010, a website has started selling fake versions of the new note. sells imitation certificates, which are stamped and written on official doctors’ letterhead for £9.99 (when last checked they were on a “buy one get one free” offer).  The website advertises the notes as “real looking fake doctors’ sick notes from all UK medical facilities”.

Although the website may claim that the certificates are for novelty purposes only, employers should take care when checking fit notes being used to claim sick pay.  Employers should treat employees who provide fake fit notes as potentially guilty of misconduct and deal with them under their disciplinary procedures.

Employees – do they read their employment contract?

Magazine Which? has recently surveyed 4,000 employees to find that 26% of them only skim read their employment contracts and 6% have not read them at all, putting them at risk of unfair treatment from their employers.  The survey also found that at least 2 million employees in the UK do not have an employment contract.

All employers, regardless of size, must issue a written statement containing the basic minimum particulars of employment required by section 1 of the Employment Rights Act 1996 within 2 months of an employee’s start date.  Whilst failure to do so is unlikely to result in a claim in itself, it would potentially cast the employer in a bad light in the event of a Tribunal claim.  In addition, if a Tribunal claim succeeds and there is no compliant statement, the Tribunal must award either 2 or 4 weeks’ pay as compensation for this failure.

Sarah Winter, Senior Solicitor

Rent reviews and break clauses

In the present difficult property market conditions issues such as rent review and the inclusion of tenant break options are matters which regularly require to be considered when negotiating the terms of a new business tenancy.

Traditionally rent review clauses contained in the leases of Scottish commercial property tended to operate on the basis of being upward only with any increase in rent being calculated on an “open market value” basis where the reviewed rent was determined by comparison with the value of comparable commercial premises exposed for let on similar terms and conditions as contained in the lease of the premises where the rent is being reviewed. Given the effect of the recession landlords have found it difficult to obtain rental evidence necessary to achieve an increase in rents and it is therefore becoming more common for landlords to seek to link any increase in rent upon review to the Retail Price Index (“RPI”). The RPI was introduced in 1948 as a measure of inflation and it is calculated by reference to a basket of goods of all descriptions but was never intended for use in the determination of rents of commercial properties and as such its use for this purpose can produce uncertain results. Careful consideration has to be given in every new lease on how any review of rent should be structured and professional legal and valuation advice given to avoid, in so far as possible, failure to achieve any increase in rent upon review.

Turning to the matter of break options, the trend in recent years has been to see the length of business tenancy agreements reduced. Where leases of 20 years were common not so long ago it is now much more likely that commercial leases will be granted for a shorter period of 5 to 10 years. A landlord, having satisfied himself on the covenant of a potential tenant, will seek to ensure that the proposed lease is a long as possible, whilst a tenant might regard a longer period as being necessary to amortise the cost of fit-out, may also seek to negotiate one or more break clauses entitling the lease to be terminated as a defence against changing market conditions. This is of particular importance where a business tenancy agreement is being entered into in respect of a newly established business where longer term profitability cannot be assured. Again professional advice is needed by both landlords and tenants when weighing up the relative advantages and disadvantages of the use of such options.  Recently there have been instances where a landlord has been persuaded to agree forego one or more future rent reviews in exchange for the tenant undertaking not to exercise a forthcoming tenant’s break option.

The terms of a business tenancy agreement are of vital importance to ensure the viability of the lease in changing market conditions and Blackadders can advise on all aspects of commercial leasing whether from the point of view of a landlord or tenant.

Ken Scott, Associate