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.
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:
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.
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.
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:
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.
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