The tax and NIC savings of salary sacrifice have grown in
popularity over the last few years as benefits providers have
increased their products. Despite the temptations offered by
pushing boundaries, a recent case has underscored some key points
to remember in order to operate a "safe" salary sacrifice
A statutory exemption allows employees on temporary assignment to receive travel and subsistence payments tax and NIC free for up to 24 months. In this case, employees, who routinely worked in different places, agreed to reduce their salary and instead received a compensating (and intended to be tax and NIC free) cash payment.
The judges accepted that the scheme had in form been properly implemented. There had been the necessary contractual changes (and so this scheme survived HMRC's normal first point of attack). However, they did not agree that this in substance amounted to reducing cash "earnings", which is what is necessary for any salary sacrifice to take place successfully for tax purposes. There were three key reasons:
- The judges attached a great deal of weight to employees not
really understanding that they were receiving a payment of expenses
rather that a straight cash payment. This pointed to employees in
their own minds (even if not in the mind of their employer) as not
having sacrificed any salary at all. This part of the judgement
therefore suggests that employers should go out of their way to
explain what is happening when salary sacrifice occurs, although in
most cases this will be reasonably obvious as employees will be
receiving a non-cash benefit rather than another type of cash
payment, as was the case here.
- A potentially controversial point is that the employee had to
receive a "benefit" in some way for these arrangements to
be effective. This was clouded where the employer took the benefit
of tax and NIC savings. This has not to date been thought a
necessary element of salary sacrifice, which has just looked at the
nature of what has been given up and the nature of what is instead
received. Equivalent value etc has not been thought relevant, and
there have indeed been many cases where the employer keeps all of
the NIC savings. It is not entirely clear what point the tribunal
is making here, but if this is picked up by HMRC in guidance, this
would be a major development in this area.
- The final point was that employees were free to opt out at any time. HMRC advise that employees can opt in or out of salary sacrifice arrangements only every 12 months or on a significant event. It is likely that there is some capacity for greater flexibility, but at some risk. Most salary sacrifice arrangements nowadays are alert to this point. However, complete employee flexibility, as was the case here, does not work. Employees are then treated as having the right to a cash equivalent, which is therefore taxable as cash earnings.
In this case, the relevant scheme was operated over
several years and approximately £160 million was reportedly
at stake, leading to a 3 week tribunal hearing with 2 judges and 3
Another interesting point is that until the last couple of years, the only salary sacrifice tax case dated back to the 1960s - since then there have been two high profile cases, the AstraZeneca case in the European Court of Justice on VAT recovery (which led to HMRC changing its position) and now this case.
For a link to the case, please click here.
This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq
Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.
The original publication date for this article was 07/02/2012.