Sarah Laing looks at the income tax exemption for trivial benefits and its implications for employers.
Finance Bill 2016 contains a proposed exemption from income tax for trivial benefits, effective from 6 April 2016, subject to certain specific conditions. This article looks at the new exemption and the impact it will have on reporting requirements for employers.
Fewer form P11Ds?
Several changes have been made to the rules on employee benefits and expenses from April 2016. The changes mean that for 2016/17 some employers will no longer have to complete returns of benefits and expenses (forms P11D).
The three main changes, potentially leading to fewer forms P11D for 2016/17, are:
- the replacement of the dispensation regime with an expenses exemption - broadly, where an employee would have been entitled to tax relief in full for a benefit or expense, then the employer does not need to deduct tax or National Insurance contributions (NICs), and they do not need to report it to HMRC;
- the introduction of statutory payrolling of benefits-in-kind – employers can now account for tax on benefits they provide to employees through PAYE, without having to submit forms P11D. Note that voluntary payrolling cannot be used for benefits relating to accommodation, beneficial loans, credit tokens and vouchers. Employers wishing to use the scheme for 2016/17 had to register with HMRC prior to 6 April 2016; and
- the introduction of a statutory exemption for trivial benefits.
Trivial benefits exemption
Prior to 2016/17, employers were required to agree with HMRC whether benefits could be treated as ‘trivial’. Legislation included in Finance Bill 2016 (inserting new ITEPA 2003, s 323A-323C) will provide for an exemption for trivial benefits and, if enacted, this will apply from 6 April 2016. At the time of writing, Finance Bill 2016 is currently being debated in Parliament, so the proposals are still subject to change.
The proposals provide for an income tax and NICs exemption from 2016/17 for trivial benefits where the following conditions are met:
- the cost of providing the benefit does not exceed £50 (see below for definition of ‘benefit cost’);
- the benefit is not cash or a cash voucher;
- the employee is not entitled to the benefit as part of any contractual obligation (including under salary sacrifice arrangements); and
- the benefit is not provided in recognition of particular services performed by the employee as part of their employment duties (or in anticipation of such services).
The cost of the benefit is defined in the legislation as:
- the cost of providing the benefit; or
- if the benefit is provided to more than one person and the nature of the benefit or the scale of its provision means it is impracticable to calculate the cost of providing it to each person to whom it is provided, the average cost per person of providing the benefit.
Example: Celebration meal
Mr Jones takes his five employees out for dinner to celebrate the success of the company. The total cost of the meal is £225. Although different employees chose different food and drinks, HMRC will accept that the cost per head can be taken as £45 (£225/5). The benefit of the meal is therefore covered by the exemption as the cost per employee does not exceed the £50 trivial benefit limit.
Mr Jones does not therefore need to record the benefit on the employees’ annual return form P11D.
Directors and officeholders
Trivial benefits provided to directors or other office holders of close companies (broadly, those with five or fewer participators), or to members of their families or households, will be capped at £300 per tax year.
Practical Tips:
- Where an employee receives a benefit exceeding £50, the whole amount becomes taxable, not just the excess, and it must be accounted for accordingly.
- The exemption applies equally to benefits provided to an employee, or to a member of his or her family or household, subject to the £50 limit.
- The government will be monitoring the use of the exemption, and if it believes it is being abused, adjustments to the qualifying conditions and/or the annual cap are likely.
