Cars supplied to employees through salary sacrifice scheme

The hospital trust leased cars which it subleased to its employees under a salary sacrifice scheme. Employees could use the cars for business and private purposes.

It claimed input tax on the basis that this was not a business supply (VATA 1994 s 41(3)). HMRC restricted recovery to 50% saying the VAT had been incurred for the purpose of the trust’s business so that the VAT (Input Tax) Order 1992/3222 (the blocking order) applied.

The issue was whether the car scheme was an economic activity for the purpose of the Principal VAT Directive art 9. The trust said when an employer provided a leased car through a salary sacrifice scheme it was ‘de-supplied’ for VAT purposes so that the supply is deemed not to have taken place (VAT (Treatment of Transactions) Order SI 1992/630). As a result no output tax was due on the...