Following a recent ruling by the European Court of Justice, HMRC has announced new guidance on the way in which employers should treat VAT in relation to salary sacrifice arrangements.

Childcare vouchers are not subject to VAT and therefore are not affected by the ruling, however, the changes affect employers who incur management fees on top of the vouchers.

Under current rules employers have been permitted to fully recover Input VAT on management fees. The new ruling which comes into effect as of 1st January 2012 suggests that the Input VAT on the management fees must now be treated as being directly attributable to an exempt supply. This means that the VAT incurred may no longer be fully recoverable and will be subject to partial exemption rules.

For further information see HMRC’s Customs Brief 28/11 (http://www.hmrc.gov.uk/briefs/vat/brief2811.htm)

Employers unsure as to whether these changes will affect them should contact their adviser or accountant for further clarification.