Is the provision of childcare vouchers through salary sacrifice ‘remuneration’?

Published

22nd March 2016

In a recent Employment Appeal Trubunal decision, Peninsula Business Service Ltd v Laura Donaldson, the EAT has made a decision regarding the provision of childcare vouchers through a salary sacrifice arrangement during maternity leave. There has been no definitive case law on the position until now.

The question of whether salary sacrifice childcare vouchers must be paid throughout maternity leave is centred on whether the vouchers are considered to be ‘remuneration’. Under the Maternity and Parental Leave Regulations 1999 (MPL Regs), women are entitled to the terms and conditions which would have been available to them had they been at work except for terms which were ‘remuneration’ and this applies throughout the period of maternity leave. ‘Remuneration’ has been defined in the MPL Regs as “sums payable to the employee by way of wages or salary”.

Previous legal commentary and published HM Revenue & Customs guidance has been that childcare vouchers provided through a salary sacrifice scheme are not remuneration. As such, childcare vouchers have been considered to be a non-cash benefit which is required to be paid throughout the period of maternity leave under the MPL Regs.

However, in the recent EAT decision , the Honourable Mr Justice Langstaff and the Tribunal have turned this approach on its head. The Tribunal decided that childcare vouchers are remuneration and that a salary sacrifice childcare voucher was not a benefit beyond wages and salary. The Tribunal said that the sacrifice of salary for childcare vouchers was a “diversion of salary” which the employee earned which was re-directed before it was paid to the employee to purchase the childcare vouchers. In addition, the EAT noted that if childcare vouchers were to be continued throughout maternity leave it would create a “windfall” benefit for the employee who was in such a scheme but also, it would impose a cost on the employer.

This conclusion is arguably in conflict with the factual status of salary sacrifice schemes, in that in order to be effective for tax purposes, such schemes require there to be a contractual change to the remuneration paid to the employee. The EAT decision also contradicts the analysis which HM Revenue & Customs applies to such a scheme. If the EAT’s analysis is correct, and the provision of vouchers in salary sacrifice schemes amounts to a diversion of cash remuneration, it means that salary sacrifice schemes may not work from a tax perspective.

If the EAT is correct in its analysis, the decision would undermine the tax status of salary sacrifice schemes. It is likely that there will be further commentary on this issue, and we think this decision is ripe for appeal – so watch this space!

Morton Fraser MacRoberts LLP

MacRoberts LLP, one of the largest independently owned law firms in Scotland, was founded over 150 years ago by the MacRobert family. We are a leading Scottish commercial law firm with full-service offices in Dundee, Edinburgh and Glasgow with a client base that reaches across Scotland and beyond.

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