Providing employees with small, irregular benefits such as drinks at the pub, flowers on their birthday, or gift vouchers at Christmas is common practice. Whilst these benefits are seen as a token of generosity by employers, it is important for employers to know what is taxable and what is not.
An exemption does exist; the ‘Trivial Benefit’ exemption, which applies to small, ad-hoc benefits provided to employees. The conditions that must be met in order for the exemption to apply are as follows:
- The value does not exceed £50 (incl VAT);
- It is not in the form of cash or a cash voucher (i.e. a cheque or payable order);
- It isn’t a reward for work or performance;
- It isn’t expected under the terms of an employment contract.
The ‘reward for work or performance’ condition is often a problem area as small gifts, such as vouchers, are commonly provided as a ‘thank you’ in recognition of work carried out. Any gifts should be ad-hoc and not for recognition of a job well done, therefore it is best practice to record the benefit and reason or motive behind it.
Similarly, if a voucher is provided as part of a new employee welcome package it would need to be a ‘welcome to the firm’ for the exemption to apply, rather than as an incentive to attract staff.
Care must also be taken for ‘trivial’ benefits provided regularly. HM Revenue & Customs often take the view that benefits which are provided regularly to staff may be considered as ‘expected under the terms of an employment contract’, or essentially part of the employee’s remuneration package. Therefore, the ‘Trivial Benefit’ exemption would not apply. The term ‘regular’ is not defined by HMRC but a trip to the pub once every few months could be considered ‘trivial’, yet a trip once a week may not. So again, care would need to be taken when providing employees with smaller perks.
If a benefit does not meet the above conditions, then the whole value would be taxable on the employee. Benefits can be reported via end of year P11D forms, but this requires the employee to pay the income tax on the value of the benefit, with the employer paying the National Insurance (“NI”).
It is more common for small, irregular benefits to be reported on a PAYE Settlement Agreement (“PSA”) whereby the employer meets both the income tax and NI charges. Utilising a PSA can be costly as the income tax due is calculated by grossing up the benefit by the employee’s marginal tax rate. The tax and NI liability can be as much as the cost of the benefit itself.
For more information on reporting of benefits please see our recent blog article: Employment benefits: reporting window is just around the corner or contact myself or David Smith at firstname.lastname@example.org.