Mark McLaughlin highlights some potentially tax-efficient goodies for employees this Christmas.
Christmas brings the exciting prospect of gifts and parties. Many employers wish to ‘treat’ staff at this time of year, and if they can do it in a tax-efficient way, so much the better!
Let’s get the party started!
The Christmas ‘do’ is a popular event in many businesses. Staff entertaining does not result in a benefit-in-kind for employees, subject to a £150 per head limit. This exemption applies only to annual events - the perfect excuse to get planning for next year’s party!
A trading deduction for the party would be the icing on the cake. Staff entertaining is allowable if it is wholly and exclusively for the purposes of the trade and is not merely incidental to entertainment which is provided for customers.
Tax relief for your gift?
For business owners who are thinking of giving their employees a Christmas present, there is an income tax exemption for ‘trivial’ benefits provided by employers (ITEPA 2003, ss 323A-323C), where certain conditions (paraphrased below) are met:
A: The benefit is not cash or a ‘cash voucher’.
B: The ‘benefit cost’ does not exceed £50.
C: The benefit is not part of ‘relevant salary sacrifice arrangements’ or other contractual obligations.
D: The benefit is not provided for particular employment services 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.
More good news!
There are no Class 1A National Insurance contributions (NICs) on benefits which are exempt from income tax. Furthermore, there is a matching exception from Class 1 NICs for non-cash vouchers.
Importantly, the £50 limit applies per benefit, not per tax year. For example, during the tax year, an employer gives an employee a Christmas hamper (costing £45), a bottle of wine as a birthday gift (£30) and a gift card on the birth of the employee’s child (£40). All three gifts are within the trivial benefit exemption.
The £300 annual exemption
For the purposes of Condition E (which basically applies to closely-controlled companies), 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 calculating the ‘available exempt amount’.
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 HMRC’s Employment Income manual at EIM21870).
Practical tip
Be careful: for directors, if the benefit cost for the employee exceeds £50, the full amount is taxable, not just the excess over £50; and 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.
