Saving VAT on employee benefits
Giving your employees benefits-in-kind (BiK) can be a tax-efficient way of rewarding them, but it still costs money. You can reduce this by reclaiming the VAT you paid in providing the BiK, but what are the consequences?
General rule
One of the most frequently asked questions an accountant hears is “can I get the VAT back on that”. It’s a loaded question as the rules are tricky to say the least. So the reply tends to be carefully phrased, but the gist of it will be that provided it’s a genuine business expense, then “yes”. However, as one of our subscribers recently found out during a VAT inspection, when it comes to the cost of employee benefits there is another side to the story.
Perks
Our subscriber’s company, employing around 60 people, offered its senior staff free health club membership as a perk. It paid just over £4,500 plus VAT per year to the club. The company reclaimed the VAT of around £800. When the Taxman said that he was coming to inspect the business records the bookkeeper was confident that there wouldn’t be a problem. He was right; giving your employees perks is a business expense and so you can claim the VAT back on the cost.
In and out
So far so good; the Taxman confirmed that the VAT reclaimed was OK but then asked the bookkeeper to confirm that he had accounted for output tax, in other words charged VAT, on the supply of the membership to the staff. Apparently, you could have heard a pin drop. The bookkeeper didn’t need to reply, the deathly silence was confirmation enough that no VAT had been paid.
It’s a supply
Employees may not be customers in the commercial sense but where you’re registered for VAT and supply goods or services to them you must account for VAT. You don’t need to collect money from your staff, you can just work out the VAT on the total value, e.g. in the case of our subscriber that was 17.5% of £4,500 = £787.50. This exactly cancelled out the VAT the company had reclaimed on the cost of membership.
Tip. The good news is that there’s an exception to the rule where you offer a perk to all your employees (not just a selected few), even if not all of them take it up. In this case you can reclaim the input VAT but you won’t have to account for the output VAT.
Example. Acom Ltd wants to motivate its staff of 30 and so offers them a weekend away at a health spa if they meet the sales target for the current quarter. They duly hit the target and earn their weekend away but for various reasons only 15 of the staff are able to make the trip. The cost to Acom is £4,000 plus £700 VAT, which it can reclaim.
Trap. Even where the perk is offered as an incentive, VAT can’t be recovered if it’s only business owners or company directors that can benefit. So if you’re a small company where there are no other employees apart from the shareholder/directors, you wouldn’t be able to reclaim the VAT on the cost of certain perks (see The next step). And worse still, you would have to pay the Taxman output VAT.
For examples of perks where input VAT can’t be reclaimed, visit http://tax.indicator.co.uk (TX 10.22.06).
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