The new trivial benefits exemption – what you need to know
HMRC are introducing a number of significant changes to the benefits and expenses rules from 6th April. One such change is the introduction of a new statutory exemption for trivial benefits.
There has for many years been an exemption for small and seasonal gifts made by an employer to its employees, but to this point we have had to rely on HMRC practice and guidance. Typical examples of exempt items might include:
- Provision of workplace tea and coffee for staff
- Flowers or similar gifts on occasions such as marriage, birth of a child, illness etc.
- Seasonal gifts such as a turkey, an ordinary bottle of wine or a box of chocolates at Christmas
In order to qualify for the exemption, the gift cannot be part of any reward for services, nor can it be in the form of cash or non-cash vouchers (i.e. typical store vouchers).
New rules from 6th April
As part of putting the trivial benefits exemption on a statutory footing from 6th April 2016, HMRC have firmed up on some of the rougher edges of the rules. Surprisingly, the new statutory rules include some relaxations to the current rules and also give scope for some employers to benefit more under the new rules than they can at present. In general, for a benefit to qualify for the trivial benefits exemption, all of the following tests must be met:
- The cost of the benefit cannot exceed £50 (or the average cost per employee if the benefit is provided to a group of employees and it is impractical to work out the exact cost per person)
- The benefit cannot be cash or a cash-voucher
- The employee cannot be contractually entitled to the benefit (including via a salary sacrifice arrangement)
- The benefit is not provided in recognition of services performed by the employee
To avoid smaller companies taking advantage of this, any benefits provided to directors or other office holders (or their families) of close companies have the exemption capped at a total cost of £300 per tax year.
If any of these conditions are not satisfied, the benefit is taxed in the normal way, subject to any other exemption (such as the annual staff function exemption). Importantly, if the cost exceeds the £50 limit, the whole of the benefit is taxed, not just the excess.
Whilst no major changes have been made to the rules as they were, there are some subtle differences worth noting:
Vouchers are now allowed
Firstly, non-cash vouchers are now allowed, whereas they haven’t been to this point. So employers who might prefer to give store vouchers to their staff at Christmas can now do this and benefit from the exemption. Previously, only seasonal gifts such as wine or food hampers could be given within the exemption – any vouchers were subject to both Income Tax and National Insurance (although the voucher cost might be typically be put through a PAYE Settlement Agreement for the employer to pay the tax/NIC on a grossed-up basis). So this will no doubt be a very welcome relaxation for many employers.
Staff entertaining can also benefit
Prior to these changes, any staff entertaining was taxable and either reportable on each employee’s P11D form or (more commonly) added into the PAYE Settlement Agreement (PSA). However, under these statutory rules, an employer can take its staff out for meals or provide staff events and these might now be able to benefit from the £50 trivial benefits exemption.
Provided of course that the benefit being provided is not in any way a reward for services performed (e.g. a well done meal for a top performing team or employee), the £50 per head exemption can apply. Indeed, HMRC’s own guidance gives the example of five employees being taken out for a meal to celebrate a number of birthdays at a total cost of £240. As the average cost is below the £50 limit, the benefit of the meal is covered by the exemption.
Employers have always been able to rely on the annual staff function to exempt Christmas parties and maybe other annual events (provided the combined cost of any such functions remains below £150 per head). But now other staff entertaining that does not not qualify for annual function exemption might be given trivial benefits treatment if the cost per head is below the £50 limit. This will be good news for employers who put on more staff events than the annual Christmas party, as they should find their PSA costs notably reducing from April as many of those events might become exempt from tax and NIC.
It is important for all employers to be aware of the current trivial benefits rules as we approach the P11D and PSA season for the 2015/16 tax year, but it is equally important that they know the new statutory rules as they come into force from 6th April, as there is certainly scope for employers to save on Christmas gifts and staff entertaining costs.