Employee incentive schemes – do I need to account for VAT?

It is becoming more commonplace for businesses to set up reward schemes to acknowledge staff performance, but it is also an area where hidden or unexpected VAT costs arise, which may make employee awards costlier than expected. Awarding staff with vouchers is a popular way to recognise high-performing employees, and a recent case has considered the VAT implications of this. While businesses may expect that they can recover the VAT incurred on the purchase of the vouchers for staff, if they do so, a question arises as to whether the business also needs to account for output tax too.

This was recently tested in the case of GE Aircraft Engine Services. GE Aircraft Engine Services operates an employee recognition scheme whereby employees can nominate their colleagues based on their performance and in accordance with the scheme’s eligibility conditions - the “Above & Beyond” programme. There were various levels of award, but the case only concerned the award of retail vouchers.

Given GE Aircraft Engine Services had reclaimed the input tax on the purchase of the vouchers, HMRC argued that GE Aircraft Engine Services should have also accounted for output tax on the value of the vouchers supplied to its employees as the supply constituted a ‘deemed supply’ for UK VAT purposes. Along with 19 other members of the GE Group, HMRC raised assessments for under-declared output tax. The First Tier Tribunal in the UK made a referral to the Court of Justice of the European Union (CJEU) to consider the position, and the CJEU’s judgement has recently been released.

What is the issue?

The First Tier Tribunal in the UK needed to consider whether GE Aircraft Engine Services’ supply to employees of retail vouchers met the following conditions:

1. Did GE Aircraft Engine Services make a supply of services?
2. Did GE Aircraft Engine Services provide these services free of charge?
3. Are the services supplied by GE Aircraft Engine Services supplied ‘by a taxable person for his private use or for that of his staff or, more generally, for purposes other than those of his business’?

If all three conditions are met, under Article 26 of the VAT Directive (2006/112/EC (VAT)) the supply should be treated as a supply of services for consideration and VAT will be due on the value of the vouchers provided.

The First Tier Tribunal agreed that points one and two were met, but made a referral to the CJEU on the third point.

The positions of GE Aircraft Engine Services and HMRC

Arguing that the recognition scheme is an overhead of its UK economic activities, GE Aircraft Engine Services were of the view that the supply of vouchers to its employees is solely for the purpose of its business. The advantage gained by the employees is secondary to this. Article 26 does not apply, and it does not need to account for output tax.

HMRC took the opposite view. As the vouchers are provided to employees for their private consumption outside of GE Aircraft Engine Services’ business, HMRC argued that Article 26 does apply and condition three above is met. As the Article 26 conditions are satisfied, HMRC did not find it relevant that GE Aircraft Engine Services had a business purpose for awarding the retail vouchers.

What did the CJEU conclude?

The CJEU concluded that the supply of retail vouchers by GE Aircraft Engine Services to its employees through an employee recognition scheme set up to reward high-performing employees does not fall within the scope of Article 26. GE Aircraft Engine Services did not need to account for output VAT on the supplies of the vouchers.

In reaching its decision, the CJEU considered the following:

• the private advantage gained by the employees appears to be incidental to the requirements of the business. GE Aircraft Engine Services bears the cost of the vouchers, and in return the scheme motivates employees to improve their performance, and therefore the performance and profitability of GE Aircraft Engine Services
• the vouchers provided to employees were multi-purpose vouchers (they could be redeemed in multiple retailers selling products at different VAT rates). As such, the retailers would be required to account for output tax on the date the voucher is redeemed. If GE Aircraft Engine Services were to account for output tax on its supplies, this would result in double taxation and contravene the principal of fiscal neutrality.

Does this judgement present any opportunities?

Businesses with similar employee recognition schemes will welcome the CJEU’s decision given the apparent link between recognising high performing employees, and the improved performance of the business.

If you have provided your staff with services or vouchers for free, and there is a business purpose for providing these services, you should consider whether you have applied the correct VAT treatment to your supplies and establish whether a retrospective claim covering the last four years can be made.

However, it is important to note that the GE Aircraft Engine Services case looked at multi-purpose vouchers only, and the rules for vouchers changed as of 1 January 2019. While the case looked only at a certain type of voucher, there are a range of services companies may purchase to reward their employees. Although it is uncertain as to how binding the decision will be on UK courts, the CJEU’s decision is at the very least persuasive. Businesses should review whether they can recover input tax on those services purchased to award employees, without having to pay an additional output tax charge, and consider whether any claims can be made for over-paid VAT. For completeness, it is worth noting that the VAT treatment for goods is also different to those of services.

The provision of non-cash vouchers gives rise to a taxable benefit in kind on the employee. Therefore, employers should consider the income tax and National Insurance Contributions (NIC) reporting options available to them, and determine the taxable benefit amount as this may be different to the face value of the vouchers provided.

If you would like further information into this matter please get in touch with Robert Marchant, or your usual Crowe contact.