Spending money on your staff and VAT claims....

VAT on staff benefits in kind

Providing your employees with benefits in kind is a supply for VAT purposes on which you might have to account for VAT. However, special rules and HMRC concessions mean this doesn’t apply in all circumstances. So when can you take advantage?

VAT and employee benefits

The VAT rules don’t differentiate between supplies made to your business customers and those to your employees. This means the normal VAT rules apply when you supply goods or services to your employees as benefits in kind . You can reclaim any VAT paid on the cost of providing benefits but in some circumstances you must account to HMRC for the corresponding VAT when you supply the benefit to your employees. This usually makes the position for benefits VAT neutral.

Example. Acom Ltd offers several of its employees a free top of the range mobile phone and call plan as a perk. The total cost of providing the benefit is £6,000, which includes VAT of £1,000. Acom can reclaim this but it must account for VAT on the value of the supply of the phones and call plans. The value of this is £5,000 and the VAT at the standard rate is £1,000. It must account for this on its return for the VAT period in which it supplies the phones etc.

Simplification. By concession HMRC simplifies the rules by not requiring you to account for VAT on benefits you provide if you don’t reclaim that paid on the cost of providing them. This means the VAT neutrality is maintained but with less admin. However, in some circumstances you can do better; you can reclaim the VAT paid on the cost of the benefits without having to account for it when you supply them to your staff.

Tip. You’re not required to account for VAT if you offer the same benefit to all your employees. This VAT let-off applies even if some employees choose not to take the benefit.

Tip. Another exception applies if the cost of a benefit added to that for others provided in the previous twelve months to the same employee is no more than £50 (excluding VAT). This exception to applies whether you provide the benefit in kind to all employees or just some.

Exempt benefits

If the benefit is VAT exempt, e.g. medical insurance, you aren’t required to account for VAT. The bad news is that if you pay VAT on the cost of providing an exempt benefit, you can’t reclaim it unless the amount is de minimis. For example, VAT on an insurance agent’s fees for arranging staff medical cover.

Discounted benefits

The VAT position is different where you provide an employee with a benefit that they pay towards. If the amount they pay is reasonable, and not just a token sum, you’re only required to account for VAT on the amount the employee pays and not the cost of the benefit to you.

Example. Bcom Ltd pays for corporate membership of a health club. The annual fee is £12,000 (including £2,000 VAT). It offers health club membership to its senior employees and directors for a total cost of £48 per month. Bcom can reclaim the £2,000 VAT but must account for £8 VAT on each employee or director’s monthly subscription (£48 x 120/100).

You can reclaim any VAT paid on the cost of providing benefits but when you give them to your employees you must account for VAT. This makes the VAT position neutral. However, you’re allowed to reclaim the VAT paid on the cost of providing the benefit without having to account for it when you supply it to your staff. For example, where all employees are offered the same benefit in kind.