29 November 2022
In what may be the final UK originating VAT case to be decided in the European courts, the Court of Justice of the European Union (CJEU) has decided that an employee reward scheme that awards vouchers to staff as recognition for good work has a business purpose. This meant that the employer could recover VAT on the cost of purchasing the vouchers without having to pay it back to HMRC when the vouchers were given away to employees.
UK company, GE Aircraft Engine Services Ltd (GE) ran an employee incentive scheme that allowed its employees to nominate particularly helpful or hard-working colleagues for an award. Once approved by management, the successful employees were given a voucher that could be redeemed with the retailer of their choice.
In court, HMRC argued that the fact that GE had given away vouchers to staff meant that it was putting them to a private, personal use by its employees, so provision of the vouchers constituted a supply on which VAT was due from GE. This would have increased the employer’s cost of running the scheme by a notional VAT charge when the vouchers were given away.
However, the CJEU has accepted that GE’s voucher scheme was designed to improve staff performance, which would also have the effect of improving the company’s financial performance. As a result, while the vouchers might be used by the staff for private purchases, the reward of the vouchers had a business purpose, and it is that purpose which determines the VAT treatment.
As the case was referred to the CJEU just before the UK left the EU’s VAT system on 1 January 2021, this judgment will be binding in the UK. While HMRC has yet to issue a statement on the impact of the court’s decision, the GE judgment looks set to force a rethink of its current policy on the VAT position of these schemes. HMRC’s existing guidance, which states that employers must bear the VAT cost of rewards given to staff unless the perks in question are given to all employees, may now be incorrect.
This outcome will be welcomed by the wide range of businesses that operate similar voucher schemes to reward their employees. However, due to the complex VAT rules on vouchers, the amounts that can be claimed will vary from scheme to scheme. For example, a business may now be able to recover VAT paid on a ‘single purpose voucher’ which can only be used to buy goods or services set at the same rate of VAT. However, employers should not have incurred VAT on the purchase of ‘multi-purpose vouchers’ which can be redeemed against the purchase of a variety of goods and services with differing VAT treatments, as the VAT on these is accounted for by the retailer when the vouchers are redeemed.
In practice, many different VAT accounting approaches are likely to have been used by employers on such schemes and some may find that the GE decision will present an opportunity to reclaim VAT that may have been overpaid in the past. If so, the four-year cap on retrospective VAT refunds means that a prompt claim will maximise the benefit of any claim arising from this judgment.
While waiting for HMRC’s reaction to the GE judgment, businesses should review their historic VAT treatment of these schemes to determine whether any adjustments need to be made.