The majority of small gifts and entertainment provided to employees, such as those gifted on the occasion of the birth of a child or Christmas, no longer need to be included in end of year reporting if certain conditions are met.
This means employers need to review their records in more detail to pull together the correct information for P11Ds and PSA, and to ensure costs are not excluded that are then subsequently challenged by HMRC as being taxable.
The trivial benefit changes
The rules state that a Benefit in kind (BiK) provided by an employer to an employee is exempt from tax as a trivial benefit, if all the following conditions are satisfied:
- the cost of providing the benefit does not exceed £50
- the benefit is not cash or a cash voucher
- the employee is not entitled to the benefit as part of any contractual obligation (including under salary sacrifice arrangements)
- the benefit is not provided in recognition of particular services performed by the employee as part of their employment duties.
The exemption has a further cap of a total cost of £300 in the tax year if
- the employer is a close company, and
- the benefit is provided to an individual who is a director or other office holder of the company, or a member of their family or household.
Class 1A NICs can only arise where there is an income tax charge. So, where a benefit is exempt from tax under the trivial BiK rules, there will automatically be no Class 1A NIC liability.
The exemption applies equally to benefits provided to the employee or to a member of the employee’s family or household.
It also applies where the trivial benefit is provided on behalf of the employer by a third party. For example, where the benefit is provided through a management services company within a group of companies or by a third party business where management services have been outsourced, provided the cost of the benefit is ultimately borne by the employer.
As for all BiKs, when determining the cost of the benefit for the purposes of the exemption you need to use the VAT inclusive amount.
The current state of play
If a benefit is not exempt, the full value will be subject to the normal benefit rules.
For example, a bunch of flowers costing £55 (including delivery) to an employee who is off sick will be taxable in full because the total cost exceeds £50. It is not just the excess over £50 that gets taxed. Before 6 April 23016, those same flowers would not have been taxed.
As a result the flowers will have to be added to the employee’s P11D. Alternatively if the employer wants to provide them to the employee free of tax, they will need to be added to the PSA.
But it’s not all bad news. There are many more situations where the new rules provide greater clarity on what is or is not taxable. The following examples show the impact of the rules post 6 April 2016:
- Employer A takes a group of employees out for a meal to celebrate a number of birthdays. Five employees attend the meal at a total cost to employer A of £240. Individual employees make different menu and drink selections. Rather than undertake a detailed analysis of the bill HMRC should accept that the cost per head is £48, reflecting an average amount of £240/5. The benefit of the meal can be covered by the exemption since the cost for each individual does not exceed the trivial benefit financial limit.
- Employer B provides each of its 100 employees with a turkey at Christmas and the total bill comes to £4,500. There are a variety of sizes. Because the employer has made a bulk order, the turkeys have not been priced up individually but would cost in the region of £40 to £60 each. Employees are able to choose which bird they have. Rather than undertake a detailed analysis of the individual benefits, HMRC should accept that the cost per head is £45, reflecting an average amount of £4,500/100. The benefit can be covered by the exemption since the cost for each employee does not exceed the trivial benefit financial limit.
- Employer C provides each of its employees with a bottle of wine costing £25 at Christmas. However, as an alternative, it provides employees who do not drink alcohol with a £25 gift voucher for a national supermarket chain which they can exchange for an alternative non-alcoholic Christmas gift. Both the bottle of wine and the non-cash gift voucher can be covered by the exemption.
- Employer D requires its employees to work through their lunch hour and provides them with lunch. The meal has been provided because of the work they are undertaking. The benefit does not satisfy the requirement that it is not provided in recognition of particular services performed by the employee and so the trivial benefit exemption does not apply. If however this refreshment is available generally to all employees, the benefit may be exempt from charge under the subsidised meals exemption at section 317 ITEPA.
- Employer E runs a call centre and gives £25 gift vouchers to employees who hit specific performance targets each week. The gift vouchers are provided in recognition of the services provided and so the exemption cannot apply.
- Employer F provides its employees with two annual functions at Christmas and in the summer. The first function costs the employer £140 per head and the second costs £40. The first function is covered by the annual parties and functions exemption under section 264 ITEPA. The second function is not covered by that exemption because the financial limit of £150 has been exceeded by the combined total of the two events. However, the second function can be covered by the trivial benefits exemption because the cost did not exceed £50.
What is the cost if the employer pays the tax?
Including amounts in a PSA is an expensive thing for an employer to do. The tax and national insurance paid by an employer on behalf of their employees is at the following effective rates:
|Normal rate of tax payable by employee
||Effective rate of tax payable under a PSA
Employers should have robust process and controls in place to validate and support how they have compiled the data that forms the basis of the P11Ds and PSA.
What employers need to do
- Make sure in each case sufficient detail is provided as to the cost, reason for the expense and numbers of employees (or others) involved.
- Make sure expenses are posted to the right accounting codes.
- Review your PSA data and see if anything else can be excluded in light of the above.
- If items are excluded from the PSA, ensure that suitable records are kept to summarise the reason why any amounts have been excluded
- Review internal policies and procedures to see if changes are required to reflect the trivial benefit rules