The Court of Appeal (CoA) decision (Revenue and Customs Commissioners v Northumbria Healthcare NHS Foundation Trust  EWCA Civ 874), about the VAT treatment of NHS salary sacrifice lease cars
Last year, the Upper Tribunal (UT) found in favour of Northumbria Healthcare NHS Foundation Trust that the provision of lease cars to NHS employees (including employees of other Trusts) under salary sacrifice was not a business activity for VAT purposes. HMRC appealed to the Court of Appeal (CoA) arguing that that the supply of the car under salary sacrifice arrangements was an ‘economic activity’, in which case output tax would be due.
The CoA has now dismissed HMRC’s appeal, agreeing that the lease of a car to an employee under salary sacrifice is ‘de-supplied’ by the VAT (Treatment of Transactions) Order 1992 and also it’s not an ‘economic activity’.
This subsequently means that the Blocking Order, which restricts VAT recovery to 50% on the lease of a car made available for private use can’t be applied. It also means that because the salary reduction from an employee isn’t a supply, the VAT on the lease can be recovered under contracted-out services (COS) Heading 26: ‘Hire of vehicles including maintenance’.
In summary, there should be no output tax on the salary sacrifice deduction paid by the employee, but the VAT incurred on the lease of the car can be recovered in full under COS 26.
Tusker spoke with Tax Advisors PS Tax & NHS VAT specialists CRS VAT following the ruling and they have suggested that any Trust which has submitted a claim on the back of the previous Upper Tribunal decision should now seek repayment from HMRC. If a claim hasn’t yet been submitted, this decision should allow NHS bodies the opportunity to submit claims to HMRC for either:
A. 50% of the remaining COS VAT on lease cars (where the Blocking order has been applied) going back to October 2012.
B. 100% of the output tax declared on lease cars provided to employees under salary sacrifice schemes (where 100% of the VAT has been claimed and output tax declared) going back four years.
Where situation B applies, any reclaim of Output Tax may have to be repaid to the employee under unfair enrichment rules. This payment would then become subject to PAYE, NICs and Pensions contributions, for both employer and employee.
HMRC’s guidance states that VAT claimed under the COS rules should normally be claimed within 3 months of the end of the financial year in which the relevant supply was received. The only exceptions required a claim to be made within 4 years from the end of the prescribed VAT accounting period in which the relevant supply was received by the claimant.
Although the Upper Tribunal found last year that the four-year cap was not unreasonable, they allowed the claim from 1 October 2012 (i.e. more than four years from the date of the Claim on 31 March 2017), because of the express terms within HMRC’s Interim Guidance Note for Salary Sacrifice lease cars in September 2016.
This is fantastic news for Trusts that operate salary sacrifice car schemes as it will make the salary sacrifice car scheme pricing even more attractive moving forward by removing VAT restrictions from quoting.