New approach to salary deductions may affect VAT on employee benefits

Following a ruling by the Supreme Administrative Court (HFD) concerning workplace massage, where the employee paid part of the cost through a net salary deduction, the Swedish Tax Agency has revised its position on benefits financed through ongoing salary deductions. For employers, this raises new questions about how employee benefits should be treated, both from a tax and VAT perspective.

Employee benefit or taxable supply?

Previously, the Supreme Administrative Court found that providing company bicycles in exchange for a gross salary sacrifice could constitute a VATable supply. Based on the new ruling, the Swedish Tax Agency now takes the view that, in many cases, output VAT can be calculated on the value of the salary deduction rather than on the employer's cost. The Swedish Tax Agency has also extended this interpretation to company cars and fuel benefits.

As a result, employers may need to review how various employee benefits are structured and administered, not only for income tax purposes but also from a VAT perspective.

Company cars: uncertainty around what is actually being supplied

The company car benefit illustrates the complexity of the issue. Several regulatory frameworks apply simultaneously.

A company car may:

• be used in the employer's business operations
• be used privately by the employee
• give rise to a taxable car benefit
• be financed through a leasing arrangement
• be paid for, in whole or in part, by the employee through gross or net salary deductions

What is the employer actually supplying?

Is it an employee benefit, a right to use the employer's vehicle for business purposes, or could it in some circumstances be regarded as a vehicle rental service? If it were to be considered a rental service, this could potentially create opportunities for greater VAT recovery on the purchase or lease of the vehicle by the employer.

For this reason, it is not necessarily clear that a vehicle provided in exchange for payment should be treated in the same way as a traditional company car benefit when assessing the employer's entitlement to deduct input VAT.

What do employers need to consider?

Where an employee benefit is funded wholly or partly by the employee, employers should consider the following:

• What is the employee actually paying for?
• Is the payment made through a gross salary sacrifice or a net salary deduction?
• Should VAT be charged on the payment?
• Is the consideration provided at market value, or could a reassessment of the VAT taxable amount become relevant?
• How does the arrangement affect the employer's right to recover input VAT?
• Are there any special rules depending on the nature of the benefit being provided?

For company cars, employers must also consider both business and private use when determining any taxable benefit. To ensure compliance and maintain adequate documentation, it is advisable to keep a mileage log that can demonstrate how the vehicle has actually been used should questions arise from the Swedish Tax Agency.

Employee benefits may raise more VAT issues than you expect

What may initially appear to be a straightforward employee benefit can, in practice, give rise to a number of complex VAT considerations. For organisations with large workforces and extensive benefits programmes, it may therefore be worthwhile reviewing agreements, payroll processes and VAT procedures to ensure they remain fit for purpose.

Recent case law demonstrates that the distinction between an employee benefit and a taxable supply is not always clear-cut. The company car example further illustrates that the classification may also affect the employer's own VAT recovery position.

The issue is therefore not only what the benefit costs the employee, but also what the employer is actually supplying.

Need help assessing the VAT implications?

When the boundaries are unclear, ensuring the correct VAT and tax treatment can be challenging.

Azets' specialists can help you review your employee benefit arrangements, payroll processes and VAT procedures in light of the latest guidance and developments. Get in touch with us to discuss how we can support your organisation.