European Court of Justice (CJEU): Decision on corporate welfare and vouchers for employees

On 17 November 2022, the Court of Justice of the European Union ruled on corporate welfare in the case of a UK company that offered vouchers to its employees as part of a programme to reward the most deserving and efficient staff.
According to the European Court of Justice, such provision does not fall within the scope of Article 26 paragraph 1(b) VAT Directive, and those vouchers are not subject to VAT.

At GE Aircraft Engine Services Ltd v The Commissioners for His Majesty’s Revenue and Customs (Case C‑607/20), it is disputed whether the allocation free of charge, free of charge, of vouchers to employees constitutes a transaction that is to be treated as a supply of services for consideration within the meaning of Article 26(1)(b) of the VAT Directive and must that transaction, therefore, be subject to VAT.

The beneficiaries of the measure could use the voucher via the Internet, selecting a list of retailers where they could use it.

The employer claimed a VAT deduction on the purchase of the vouchers, providing them free of charge to its most efficient employees.

The British tax authorities claimed VAT on those vouchers, considering them to be a supply of services rendered free of charge for purposes unrelated to the company's activity.

The first-tier Tribunal (Tax Chamber) referred the question to the Court for a preliminary ruling.

The issue is whether the three conditions are satisfied for a supply to be treated as a supply of services for consideration under Article 26(1)(b) of the Principal VAT Directive so that GEAES is subject to output tax in respect of it.

These are:

(a) Whether there is a supply of services;

(b) Whether these services are supplied free of charge; and

(c) Whether these services are supplied for the private use of the taxable person or its staff or, more generally, for purposes other than those of its business.

According to the European Court of Justice (CJEU), given the nature of those rewards, the allocation of the vouchers free of charge is, on the other hand, intended to increase the motivation of the employees and thus their performance, leading to proper functioning and profitability of the company. In contrast, the personal benefit that the employee thus receives is secondary to the needs of the company.

The free provision of vouchers is therefore not made for purposes other than those related to pursuing economic activities and is therefore not subject to VAT.

Employers must pay close attention to the current setup of benefit and incentive programmes for their employees to maintain a favourable tax regime for both parties, considering that employee benefit and incentive schemes are likely to become even more popular.