If you are trying to retain employees or earn their goodwill by giving them incentives than you are not alone as giving gifts to employees is being increasingly employed by all corporates. But then while giving such incentives many people fail to realise that the incentives being doled out by them are nothing but a sort of income. So, employers need to maintain a certain threshold. If they are too generous with their gifts, the recipient would be asked to pay a benefit in kind tax and could be punished also for accepting the gift.
However, businesses in UK can take a breather with Trivial Benefits in Kind Exemption. A much sought after addition to the Finance Bill it simplifies the whole process by breaking down what would and what wouldn’t constitute a breach of the tax law. In short, it just makes it whole lot easier to give gifts in a relieved manner knowing that they won’t be subject to any form of taxation.
As the name says so, Her Majesty's Revenue and Customs (HMRC) treats trivial benefits as a small form of benefits. In no way, should they be treated as ‘benefits in kind’- a form of benefits which are more substantive in nature and can go on to include a membership for a gym, car given by the company and so on. Something one would essentially call as plain taxable benefits. In other sense, Tax on trivial benefits essentially means a majority of small gifts given to employees or the entertainment provided to the employees would be free of any tax as well as national insurance.
With time their also has been a rule change on trivial benefits. That means company leaders or directors now have the leverage to be more generous towards themselves and the staff. However, as it always goes with HMRC, there are certain set of rules and regulations that one needs to follow to avoid getting taxed or being asked to opt for national insurance.
As new rules have been put in place since April 2016, employers have the liberty to provide the known ‘trivial benefits’ to their employees without giving out a declaration to HMRC.
What to consider as trivial benefits and what’s the ceiling before a cost becomes a taxable benefit?
Benefits given by the employers to the staff in form of beverages like tea, coffee and bottled water can be considered as trivial benefits. Apart from these any occasional gifts at the workplace such as a birthday flowers, a box of chocolates or a Thanksgiving turkey for Christmas can also be included as trivial benefits. Nothing new, employers have always been providing these kinds of benefits to their employees for some time.
Over the years, finding different ways to make the organisational revenues go higher has always been a required. Her Majesty's Revenue and Customs HMRC draft guidance gives you a good understanding on how employers can avail the statutory exemption for trivial employer-provided benefits. Provided the following conditions are met:
- Benefits are below £50
- Cash or a cash voucher can’t be claimed as a benefit
- Contractual obligation can’t be considered as a part of the Trivial Benefits
- A particular service performed by the employee and a benefit in lieu of it can’t be considered
- exemption is subject to an annual cap of £300 wherein the employer is a close company & benefit is given out to a director (or to family members or households)
If the above mentioned conditions are met and the cost is less than £50 or the average is below £50 per employee, the employer is exempted from declaring anything on the form P11D. Please note for contractors working in a close company (a limited company run by 5 or fewer shareholders) there is a £300 annual limit for trivial benefits.
Situations where Trivial Benefits exemptions can be used
HMRC has laid down a number of situations where the exemption can help in bypassing tax liabilities:
Employers can take out a group of employees out for a meal on their Birthdays. Let us understand this with an example. Say for instance 5 employees attend the meal coming at a total cost of £240. With every employee choosing a different selection of food & drinks the cost per person comes at £48. Now if the bill is split evenly the exemption will come in play as the cost for every individual is within the trivial benefit limit.
Benefits for the Director
Say for instance you are the director of a company and you are provided with 3 bottles of wine costing about £30, £40 and £50 in a tax year. Now adding up, the total cost of benefits ends up being £120. Here the total cost is not above the annual exempt amount of £300 and resultantly all benefits end up being covered by the exemption.
But the directors and/or office holders of a close company are subject to certain rules (a limited company run by five or fewer shareholders). Those being:
- An annual cap of £300 for trivial benefits has been setup by HMRC
- Directors can also go ahead and provide trivial benefits to members of a family or household and claim these as a part of a director’s allowance for the year of taxation.
- Trivial benefits are in addition to ‘annual event’ or staff entertaining allowance to be claimed by a director. Set at £150 per head it is inclusive of the cost for drinks, meals, stays and transport.
Understanding this with an example, let’ssay a director decides that he wants to provide office employees with 2 functions, one for Christmas & another for the summer. With the 1st function costing£140 a head and the 2nd coming to £40. Now the1st function is virtually exempted as it is an annual party function. Coming to the second it would be considered as a trivial benefit as the cost does not go beyond £50.
How much can be claimed?
As such no limit on number of ‘benefits’ provided, as long as they don’t go beyond £50 or £300 in total at the end of the year. To better understand this let us say there are 6 claims of £50, or 30 claims of £10. Now here if a ‘benefit’ exceeds £50/£300 limits they are no longer considered as eligible via the business. One does not need to pay tax or National Insurance or apprise the HMRC.
As already discussed above, trivial benefits are very small and should not be confused with ‘benefits in kind’. Since unlike trivial befits they are certainly taxable benefits.
What can’t be claimed under the new rules?
As the rules have changed, some new provisions have come aboutand there are also certain things which can’t be claimed. Those being:
- Gift can’t be cash vouchers or cash (essentially vouchers can’t be exchanged for cash). Shop vouchers are out of the question since in their lieu cash can’t be exchanged
- The ‘benefits’ cannot be a regular payment, i.e. gym membership or employee of the month
- Purchase of a working lunch or gifts related to a team building event are excluded
- Transportation fare paid for an employee working overtime (barring certain situations)
- Employees are not eligible for any benefits as part of the contractual arrangements (foregoing of salary is not permitted)
- £50/£300amounts should not be treated as allowances but as limits. So, at all times receipts must be held for claims and an expense must have been incurred in real time (Simply claiming full allowance at the end of the year won’t do). Further, employees must watch out and not spend over £50 to avoid the whole expenditure being classed as a taxable benefit rather than an excess amount.
- Benefits should not be provided for any particular services performed by employee. These services should not be as part of the duties mentioned in the employment clause.
There is also no change to the rules regarding entertaining and corporation tax. A party which qualifies for Trivial Benefits Exemption may also qualify as entertaining, which may mean that it cannot be counted towards corporation tax.
Please note if at any time the £50 limit on trivial benefits is surpassed by a few pennies also then the full value of benefit would become a taxable benefit. In this case, employees can’t simply claim go ahead and claim for trivial benefits as an annual allowance. More so, at all instances employees must have receipts for the cost of each trivial benefit before claiming corporation tax or income tax relief. Employers also need to be careful as they simply can’t provide a trivial benefit as a reward for work. For example employerscan’tjust give an employee a £50 gift for a job well done or the benefit will be taxable under the rewards for services rule. Rather the gift should be considered as a reward for a job well done in the same manner like taking the staff out for a meal.