Tax free trivial benefits – not so trivial!

Question:

I run a small business with 15 employees and I like to give my staff some perks and treats occasionally to make the company a great place to work and keep motivation high. What are the new rules I read about in the recent Budget in relation to the new trivial benefit in kind exemption?happy employees 2

Answer.

The recent Budget announced a statutory tax exemption to remove from income tax and NICs low value benefits in kind set at a £50 limit. In addition, qualifying trivial benefits in kind provided to directors or other office holders of close companies, or to members of their families or households, will be subject to an annual cap of £300.

These new measures came into force on 6th April 2016.

A trivial benefit has to satisfy the following conditions in order to qualify for the new trivial benefits in kind exemption:

• No more than £50 per benefit (or average of £50 if the benefit is provided to a group of employees and it is not possible to work out the exact cost for each individual)
• Not cash or a cash voucher (but gift vouchers e.g. for a shop, are allowed)
• There is no entitlement to the benefit as part of the employee’s contract (including salary sacrifice schemes)
• It is not provided in recognition of a work related service or employment duty
• In close companies there is a limit on the total trivial benefits exemption of £300 per tax year per director (or office holder). Normal employees don’t have this £300 limit

The exempt trivial benefits will not counted towards taxable income or class 1 NIC and need not be reported on the P11D, P9D or P11D(b).

The exemption also applies to family or household members so if there is a function where partners are invited then each employee’s partner can share the £50 trivial benefit for the particular event. Similarly, where a close company director has the £300 per year limit, any benefits provided to their family or household members are also included within this limit.

HMRC has a useful draft guidance document giving a good range of worked examples on what kind of things can be included as trivial benefits, particularly around how to use the £300 close company limit. The type of trivial benefits that are allowed include expenses such as:

• Taking a group of employees out for a meal to celebrate a birthday
• Buying each employee a Christmas present
• Flowers on the birth of a new baby
• A summer garden party for employees

The basic gist is that it has to be a freely given gift related to employee welfare and goodwill, not employment service or performance.

If the individual benefit exceeds £50 (or an average of £50 per head), the whole amount then comes taxable as a benefit in kind, not just the excess over £50.

Again, based on the HMRC Guidance document, some examples of what is not allowed under the exemption include:

• Providing a working lunch for employees (because this is related to their employment)
• Gifts, incentives or events related to performance targets or results
• Gifts, incentives or events in relation to employment services e.g. team-building events
• Taxis when employees work late

The new tax exemption only applies to the tax that the employee would suffer due to benefits in kind. There is no change to the tax you can claim in your company tax return. For example a birthday meal may well still count as entertaining, which is not allowed for corporation tax.

As a result of the new legislation, employers will no longer be required to report such benefits on either form P11D or via Pay As You Earn Settlement Agreements (PSAs) at the year end. However, employers will still be required to ensure they keep good records of who has received trivial benefits and the values to provide to HMRC in the event of any enquiries.

There is no doubt that if HMRC spot what they consider to be abuse of the exemption we can expect further restrictions to be introduced. However, we would also hope that HMRC will review the £50 cap regularly so that the exemption continues to be worthwhile for employers.

The new rules allow employers to treat employees to small benefits without worrying about tax implications provided the cost is less than £50 per head and the benefit relates to employee welfare and not to employment service or performance. Directors of close companies are limited to £300 trivial benefits per tax year.

The benefit amount can be shared between an employee and other household or family members providing the limit is not exceeded.

The advice above is specific to the facts surrounding the questions posed. Neither FPM nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.