VAT: repeal of the VAT (Treatment of Transactions) Order 1992
Published 14 September 2021
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Who is likely to be affected
Government departments and NHS bodies that supply cars to their employees under salary sacrifice arrangements.
General description of the measure
This measure will repeal the VAT (Treatment of Transactions) Order 1992 (the 1992 Order), ensuring government departments and NHS bodies cannot exploit the legislation to give themselves a VAT recovery advantage over other taxpayers. This change was announced on 30 November 2020.
Policy objective
This measure will remove redundant legislation which could be exploited by government departments (including the NHS) following an adverse decision of the Court of Appeal, resulting in their obtaining a full deduction of VAT on their employees’ own private vehicles.
This result is contrary to the operation of the VAT system, which blocks recovery of VAT on private vehicles.
There is no change in policy.
Background to the measure
The 1992 Order was enacted to give effect to a Tribunal decision. It provided for the treatment of salary sacrifice transactions in respect of employee vehicles as supplies neither of goods nor services.
However, since the 1992 Order was laid, the legislative framework around the treatment of salary sacrifice schemes and cars has changed, and new UK legislation was introduced to ensure that double taxation did not arise in circumstances where VAT recovery was restricted. As a result, the 1992 Order became redundant.
In the recent case of Northumbria Healthcare NHS Foundation Trust (A3/2019/2181) the Court of Appeal interpreted the 1992 Order in such a way that has resulted in an NHS trust being entitled to a full refund of the VAT incurred by them in respect of their employees’ own private vehicle, an outcome contrary to the purpose of the VAT system.
The Court found that the supply of the car was a non-business activity which permitted a full refund of the VAT under the UK’s VAT refund scheme for public bodies (Section 41 of the VAT Act 1994). The scheme entitles government departments (including the NHS) to a full refund of VAT on certain services that they use to carry out their non-business public service activities). The trust had previously only been recovering 50% of the VAT incurred in line with HMRC’s policy.
This decision means that any government department or NHS body that operates a salary sacrifice scheme for cars, and which had recovered 50% of the VAT incurred, would now be entitled to make a claim for the remaining 50%. There is now an unwelcome interaction between the redundant 1992 Order and the active Section 41 provisions, and so the repeal of the Order is proposed.
Detailed proposal
Operative date
The measure will have effect from 21 October 2021.
Current law
The VAT (Treatment of Transactions) Order 1992 (SI 1992/630) treats the supply of a car under a salary sacrifice scheme as neither a supply of goods or services.
Proposed revisions
The Treasury will make an order specifying the repeal of the VAT (Treatment of Transactions) Order 1992. This is a change of law, but there is no change in policy.
Summary of impacts
Exchequer impact (£m)
| 2020 to 2021 | 2021 to 2022 | 2022 to 2023 | 2023 to 2024 | 2024 to 2025 | 2025 to 2026 |
|---|---|---|---|---|---|
| – | + 5 | +15 | + 15 | +15 | +15 |
These figures are set out in Table 2.1 of Budget 2021 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Budget 2021.
Economic impact
This measure is not expected to have any significant economic impacts.
Impact on individuals, households and families
This measure is not expected to impact employees of government departments and NHS bodies that supply cars to their employees under salary sacrifice arrangements.
For existing users of a scheme, there will be no increase in cost. Future users will essentially pay the same, both based on 50% recovery.
The measure is intended to ensure that the private use of vehicles is taxed in the same way as any other privately used goods or services.
Customer experience is expected to remain broadly the same as it does not alter how individuals interact with HMRC.
This measure is not expected to have an impact on family formation, stability or breakdown.
Equalities impacts
It is not anticipated that this measure will have any equalities impacts.
Impact on business including civil society organisations
This measure is expected to have a negligible impact on some government departments and NHS bodies that supply cars to their employees under salary sacrifice arrangements.
The measure is intended to ensure that government departments can only recover VAT to the same extent as commercial entities. This change does not impact on the provision of vehicles for business use, like home visits.
This change does not affect GP practices at all, as they are not eligible bodies for the refund scheme. NHS trusts sometimes lease cars to their employees in lieu of pay and, in effect, pay a reduced rate of VAT when they buy the cars. That will continue to be the case. One-off costs will include familiarisation with the change. There are not expected to be any continuing costs.
Customer experience is expected to remain broadly the same as this measure does not alter how government departments and NHS bodies interact with HMRC.
There are expected to be no impacts on civil society organisations.
Operational impact (£m) (HMRC or other)
It is not anticipated that implementing this change will incur any additional costs or savings for HMRC.
Other impacts
No other impacts have been identified.
Monitoring and evaluation
The measure will be kept under review through communication with affected taxpayer groups.
Further advice
If you have any questions about this change, please contact David Smith on telephone: 03000 593 922 or email: david.smith7@hmrc.gov.uk.
Declaration
The Rt Hon Jesse Norman MP, Financial Secretary to the Treasury, has read this Tax Information and Impact Note and is satisfied that, given the available evidence, it represents a reasonable view of the likely costs, benefits and impacts of the measure.