Every Little (Tax Break) Helps!

Mark McLaughlin highlights an income tax exemption that could be more useful than some people might expect. 

The UK tax system is not known for its generosity when it comes to allowing tax-free benefits from an employment. Any such benefit should, therefore, be welcomed, however small it may seem.

For example, there is an income tax exemption for ‘trivial’ benefits provided by employers (ITEPA 2003, ss 323A-323C), where certain conditions are met. This exemption can be more helpful than some employers and staff might expect. The exemption applies to benefits provided to the employee or to a member of the employee’s family or household, and also where the benefit is provided by a third party on the employer’s behalf.

There are no Class 1A National Insurance contributions (NICs) on benefits which are exempt from income tax (SSCBA 1992, s 10(1)(a)). Furthermore, there is a matching exception from Class 1 NICs for non-cash vouchers (in SI 2001/1004, Sch 3, Pt V, para 6(da)). 

The exemption is subject to a number of conditions (i.e. A to E in the legislation). Conditions A to D apply to employees, and conditions A to E apply if the employee is a director (or other office holder) of a ‘close’ (i.e. broadly closely-controlled) company employer. The conditions are paraphrased below:

A: The benefit is not cash, or a cash voucher (as defined).

B: The ‘benefit cost’ (or in some cases the average cost per employee; see below) of the benefit does not exceed £50.

C: The benefit is not part of ‘relevant salary sacrifice arrangements’ (as defined) or other contractual obligations (e.g. a clause in the employment contract).

D: The benefit is not provided for particular employment services performed by the employee as part of their duties (or in anticipation of such services).

E: The ‘benefit cost’ of the benefit provided to the employee (or the amounts allocated to the employee where the benefit is provided to a family or household member (who is not an employee)) does not exceed the available exempt amount (see below).

It should be noted from Condition B above that the cost of providing the benefit (or the average cost per employee, if a benefit is provided to a group of employees and it is impracticable to work out the exact cost per person) is capped at £50. This £50 applies per benefit, and not (as some employers might assume) per tax year. 

During the tax year, an employer gives an employee a Christmas hamper costing £45, a bottle of wine as a birthday gift costing £30, and a gift card on the birth of the employee’s child costing £40. All three gifts are within the trivial benefit exemption. 

However, be careful; if the cost of providing the benefit exceeds £50, the full amount is taxable, not just the excess over £50.

For the purposes of Condition E (i.e. in relation to close company employers where the benefit is provided to someone who is a director or other office holder of the company, or a member of their family or household), the individual has an annual exempt amount of £300. 

The rules broadly provide that the benefit cost of ‘eligible’ benefits (i.e. within conditions A to D) provided during the tax year are aggregated, together with any eligible benefits earlier in the tax year allocated to the employee in respect of a member of the individual’s (non-employee) family or household (in accordance with rules in s 323B(4)-(5)), in calculating the ‘available exempt amount’.

Thus, if the cost of an additional trivial benefit results in a total cost in excess of the annual cap of £300, none of the benefit that exceeds the cap is exempt (see the HM Revenue and Customs (HMRC) Employment Income manual at EIM21869). 

Widgets Ltd (a close company) provides one of its directors with various benefits earlier in the tax year costing less than £50 each, amounting to £275 in total. A further benefit is subsequently provided, costing £50. This final benefit is not within the annual exemption.

However, members of the office holder’s family or household who are employees of the same close company are each subject to their own annual cap of £300 (see EIM21870).

If an otherwise qualifying trivial benefit is made on a recurring (e.g. annual) basis, could HMRC contend that there is a ‘contractual obligation’ to it (e.g. under an informal agreement), so that it fails Condition C? This possibility cannot be ruled out, although Christmas or birthday gifts should not normally be challenged (see EIM21867). What about regular and frequent gifts? HMRC instructs its officers (at EIM21868): ‘…if an employer provides their employees with benefits on a regular or frequent basis you should consider whether they are linked to the employee’s services.’ Thus, employers who are overly generous potentially risk breaching Condition D.