Accountants Chester | Tax Tip No. 19
Trivial benefits have their own tax exemption, which if used wisely can be used to treat employees. The exemption can also be used by personal and family companies as part of a tax-efficient profit extraction strategy.
Accountants Chester | Nature of the exemption
The exemption applies if all the following conditions are met:
- The cost of providing the benefit does not exceed £50.
- The benefit is not cash or a cash voucher.
- The employee is not contractually entitled to the benefit.
- The benefit is not provided in recognition of particular services.
Where the benefit is provided to a group of employees and it is impracticable to work out the cost of providing the benefit to each individual employee, the average cost can be used instead. To fall within the terms of the exemption, this should not exceed £50.
The exemption can be used to give employees Christmas or birthday gifts or treats unrelated to their performance.
There are, however, a number of traps to be wary of.
Accountants Chester | Trap 1: Close company trap
If the employer is a close company, the total value of tax-free trivial benefits that can be provided to a director or other office holder (or a member of their family or household) is capped at £300 a year. Otherwise there is no limit on the number of tax-free trivial benefits that can be provided in the tax year.
Accountants Chester | Trap 2: Reward for services trap
The exemption does not apply if the benefit is a reward for services. This means that it does not apply to a gift given to an employee for working later or for going above and beyond what is expected to deliver an excellent service to a client. This restriction also means that it cannot be used to shelter a taxi home when an employee works late and the journey is not covered by the separate exemption for late night taxis. In each case, the benefit is a reward for services and does not pass the trivial benefit test.
Accountants Chester | Trap 3: Contractual entitlement trap
The exemption does not apply if the employee has a contractual right to the benefit. This includes a right to expect it based on employer behaviour. Here, HMRC have previously used the (somewhat ridiculous) example of employees being given a cream cake every Friday to argue that their provision falls outside the trivial benefit exemption; employees have the expectation that they will receive a cake each Friday and as such the provision will fail the ‘no contractual entitlement’ test. While this may be an extreme example, it is probably wise to vary benefits provided under the terms of the exemption to avoid a potential challenge from HMRC. However, HMRC guidance instructs HMRC staff not to challenge a gift such as a birthday or Christmas gift simply because it is provided every year. They also accept that the provision of free tea and coffee is within the exemption.
Accountants Chester | Trap 4: The gift card trap
The trivial benefit exemption only applies if the cost of the benefit does not exceed £50. Caution needs to be exercised if the benefit is provided via an app or the employee is given a gift card, which is topped up periodically. Here the cost is the total cost for the tax year, rather than that each time the app or gift card is used, and where this exceeds £50 for the tax year, the exemption will not apply. For example, if an employee is given access to an app that allows them to order a free bunch of flowers costing £30 each month, the exemption will not apply despite the fact that each bunch of flowers costs less than £50 as the cost of using the app is £360 for the tax year. The trap applies in a similar way if the employee is given a season ticket for sporting or cultural events.
Accountants Chester | Proceed with caution
Used wisely, the trivial benefits exemption can be a tax-efficient way to treat employees and engender goodwill. However, care must be taken not to fall foul of the traps. If the exemption does not apply, it may be possible for the employer to use a PAYE Settlement Agreement to settle the tax bill on the employee’s behalf.
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