Change in C2WS VAT

bails1310

We are about to sign to the above and have been sent the circular below:

On the 28th July 2011 HMRC published new guidance which states that, from 1st January 2012, VAT must be accounted for on any salary sacrifice payments relating to the Cycle To Work Scheme. This ruling follows the much publicised Astra Zeneca court case during which the European Court of Justice made a ruling stating that 'the provision of vouchers amounted to a supply of services effected for consideration' of VAT.

Employers who are able to can still reclaim VAT on the initial purchase of the Bike/Equipment as per the normal rules, however any salary sacrifice payments made to the Employer by the Employee must be subject to 20% VAT as of 1st January 2012. The changes will not be applied retrospectively.

The ruling has received a positive response as it provides clarification to Employers regarding the treatment of salary sacrifice payments. The scheme is still an extremely worthwhile benefit to offer staff as, not only do Employees still save on Income Tax and National Insurance contributions, the Employer can reclaim the VAT and save their 13.8% Employers NI contributions on the full value of the purchase.

You can read the HRMC Revenue & Customs Brief 28/11 here: http://www.hmrc.gov.uk/briefs/vat/brief2811.htm.

Unfortunately HMRC have confirmed that the changes to VAT will also be applied to people who have entered into the scheme prior to 01/01/11. For example, anybody entering into the scheme in September will be able to save on VAT during Sept, Oct, Nov & Dec but will have to pay from January.

Would I be correct in saying that an employess monthly repayments increase by 20% each month from Jan 2012?

Also, what heppens if an emploee's tax rate increases to the higher band during the year as beleive higher rate tax payers save more?

HELP!

The Rookie

VAT shouldn't be affected by tour income tax band, they are completely seperate systems.

Yes it sounds like the amount repayabale must increase by 20% from Jan, however that would only be the case if they were repaying the voucher at the minus VAT amount, not if it was at the retail amount

example1, Bike costs £1000 retail, so £833.33 before VAT, the employee is paying £83.33 a month over 12 months they are already paying the VAT so there should be no change

Example2 Bike costs £1000 retail, £833.33 before VAT, if the employer is paying £69.44 over 12 months (ie not repaying the VAT) it will rise to £83.33 from Jan.

Simon

pdw

No - the monthly payments do not "repay" the cost of the bike/voucher, so the amount of the payments doesn't matter. They're just rental payments, and under the new rules, employers are required to charge VAT on them, which they then give to the taxman.

So if you currently pay £60/month, your employer will now charge you £72/month, and give the extra £12 to the taxman. If they were to carry on charging you £60/month, they'd have to give £10 of that to the taxman, so would end up out of pocket (so they're not likely to do that!)

RufusA

I wonder how many of the hire contracts that employees entered in to allow for the employer to increase the rental charge part way through the hire period. I also wonder what scope there is within a regulated hire agreement under the Consumer Credit Act 1974 to vary the terms of a fixed length agreement without consent by all parties!

My understanding is that without the employee's consent to vary the contract, the employer is stuck with the monthly rental cost as it stands.

Therefore in PDW's example the rent would stay at £60, and the employer would be £10 a month out of pocket in HMRC's favour.

Given the relatively small sums involved I would hope most employers would take it on the chin. The additional VAT over the remainder of the term is probably less than the employers NI they've saved!

Rufus.

walkingbootweather

Rufus has a good point and I suspect that if the employee didn't provide consent, and it wasn't specified when the contact was taken out, then the employer might struggle to recover the difference.

It seems to me that the scheme is facing euthanasia.

beverick

Unfortunately Rufus hasn't got a leg to stand on. The terms of the contract are not changing as the rental amount is not increasing but rather the VAT element is being applied.

Also, the problem with the employer absorbing the VAT is that the discount would immediately become a taxable benefit.

Irrespective, the HMRC look to maintain their lingering death-grip on the scheme to the very end.

BTW, our offices are directly opposite a tax office. I worked out that if I put a single letter in each of the 2m square window along the side of our building, I could spell out the phrase F*** OFF leaching B*stards. I'd have to leave a gap for the fire door though.....

So, if anyone has a few hours to spare this weekend I'd be happy to supply the necessary paint and a couple of brushes.

Bob

Drysuitdiver

beverick wrote:

Unfortunately Rufus hasn't got a leg to stand on. The terms of the contract are not changing as the rental amount is not increasing but rather the VAT element is being applied.

Also, the problem with the employer absorbing the VAT is that the discount would immediately become a taxable benefit.

Irrespective, the HMRC look to maintain their lingering death-grip on the scheme to the very end.

BTW, our offices are directly opposite a tax office. I worked out that if I put a single letter in each of the 2m square window along the side of our building, I could spell out the phrase F*** OFF leaching B*stards. I'd have to leave a gap for the fire door though.....

So, if anyone has a few hours to spare this weekend I'd be happy to supply the necessary paint and a couple of brushes.

Bob

Prinjt it on A3 paper

pdw

beverick wrote:

Unfortunately Rufus hasn't got a leg to stand on. The terms of the contract are not changing as the rental amount is not increasing but rather the VAT element is being applied.

That's probably true.

Also, the problem with the employer absorbing the VAT is that the discount would immediately become a taxable benefit.

No - the scheme revolves around employers being able to make bikes available to employees without it being considered a taxable benefit. There's no requirement that the rental payments add up to the total cost of the bike.

beverick

pdw wrote:

beverick wrote:

.............

Also, the problem with the employer absorbing the VAT is that the discount would immediately become a taxable benefit.

No - the scheme revolves around employers being able to make bikes available to employees without it being considered a taxable benefit. There's no requirement that the rental payments add up to the total cost of the bike.

In this case the link between the cost of the bike and the repayment is irrelevant as the would be receiving an ex-gracia payment to the value of the discount. The efect is to increase the employee's salary by the value of the discount and hence generate a taxable benefit attracting income tax at the marginal rate.

Bob