No taxable supply on salary sacrifice adjustment

In Pertemps Limited v HM Revenue & Customs [2018] UKFTT 0369 (TCC) the Tax Chamber of the First-tier Tribunal (FTT) has allowed appeals against assessments to VAT which HMRC contended was payable on a “margin” said to have been charged by Pertemps on operating a salary sacrifice scheme.

Various Pertemps companies, acting as employment businesses, supplied their own employees to work for end-users in circumstances which gave rise to a right for the employees to deduct travel and subsistence expenses from their earnings for the purposes of income tax and NIC.

Pertemps offered its employees the Mobile Advantage Plan (MAP) which gave an employee who signed up to MAP the opportunity to sacrifice an amount of salary in return for a right to reimbursement of expenses. The amount of expenses reimbursed was less, by 50p (latterly £1) per shift than the amount of expenses incurred. This was called the MAP adjustment.  HMRC issued a dispensation under the Income Tax (Earnings and Pensions) Act 2003, s 65 (as it then stood) taking the reimbursed expenses out of the charge to tax and NIC.

However another department of HMRC then claimed that the MAP adjustment was subject to VAT because it amounted to consideration for a taxable supply by Pertemps to its employees of a service, claimed by HMRC to be administration of the MAP scheme itself.

The FTT disagreed, allowing the appeal of Pertemps against assessments to VAT totalling some £716,000, with further assessments standing behind these appeals.

The FTT held that there was no supply of services for VAT purposes to participating employees. There was (it held) a “supply” for “consideration” within the meaning of Article 2 of the Principal VAT Directive. The FTT, taking a different approach from that advanced by HMRC, characterised that supply as being “exchange by the employee of a right to receive salary for a right to receive a payment of expenses for a consideration, the MAP adjustment”. However that supply, which formed part of the internal administration of Pertemps, did not constitute an economic activity of Pertemps within the meaning of Article 9 and was, accordingly, not a taxable supply.

There was another ground of appeal on which Pertemps would have succeeded anyway. Even if the MAP adjustment had been consideration for an otherwise taxable supply, the supply was in fact an exempt supply within the Value Added Tax Act 1994, Schedule 9, Group 5, Item 1. It involved an exchange by the employee of a right to payment of part of the original salary for a right to receive an expenses payment of a lower amount. This was a “dealing in money” and therefore an exempt supply.

Timothy Brennan QC acted for Pertemps Limited, the successful appellant.

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