At this time of year, many employers will be finalising their PAYE Settlement Agreement and the National Insurance contributions (NIC) treatment of benefits they provide to employees. As part of this process, employers may also be considering whether those benefits qualify for the statutory ‘trivial benefit in kind exemption’ (ITEPA 2003 s 323A)

When does the exemption apply?

Where an employer provides a benefit to its employees the benefit is exempt from tax and NIC as employment income, and in turn employer’s NIC, if all the following conditions are met:

• The cost of providing the benefit does not exceed £50 or if the benefit is provided to a group of employees and it is impracticable to determine the cost per employee, the average cost per employee does not exceed £50. Please note, however, the annual exempt amount cap that applies to directors and office holders of close companies (and members of their family and household) highlighted below.
• 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 a salary sacrifice or optional remuneration arrangement (OpRA).
• The benefit is not provided in recognition of services performed by the employee as part of their employment duties.

HMRC guidance

Are there other pitfalls?

While the exemption appears straightforward, as demonstrated above and below that is not always the case. We are seeing more cases of it being applied incorrectly. Five other common mistakes are:

1. Applying the exemption on a blanket basis to all benefits that cost £50 or less, regardless of the purpose of the expenditure. The exemption can be applied only where the benefit is not provided in recognition of services. This means that meals when employees are working late or through their lunch, non-cash vouchers awarded for meeting targets etc do not qualify.
2. Applying the exemption without first identifying whether the employee or director is contractually entitled to the benefit.
3. Not considering VAT and other costs (such as delivery charges) when applying the £50 threshold. In determining the cost of the benefit, the VAT inclusive cost must be used. If the VAT inclusive cost of providing the benefit exceeds £50, the full amount is taxable and liable to employer’s NIC.
4. Not recognising that the exempt value available to directors and office holders of close companies (including the value attributable to members of their family and household), who receive multiple benefits that individually qualify, is capped at a total cost of £300 a year.
5. Applying the exemption to benefits that are provided on a frequent or regular basis. HMRC’s view is that employers only provide benefits that are unconnected to performance on an irregular or infrequent basis. When an employer applies the exemption to benefits provided regularly or frequently (for example month-end drinks, online yoga classes), HMRC is more likely to challenge that treatment on the basis that the frequency of the benefits indicates that they are connected to performance.

What should employers do?

Employers should carefully consider whether all the conditions of the exemption are met before applying it. In particular, employers should give thought to whether:

• benefits are being provided in recognition of services or for some other purpose (such as for welfare purposes or for personal reasons). This is often the condition that’s most difficult meet, and the
• purpose of providing the benefit may not always be clear initially;
• the benefit breaches the contractual obligation condition;
• any amount is reimbursed, which would therefore not meet the conditions according to HMRC; and
• any benefit for 2021/22 is covered by the coronavirus exemptions or other exemptions.

In a worst-case scenario, where HMRC successfully challenges the application of the exemption by an employer it can seek to recover the underpaid tax (on a grossed-up basis) and NIC from the employer, together with a penalty and interest charges.

These unexpected liabilities can be significant when taken across the workforce and multiple tax years. Taking reasonable care when applying the exemption is therefore key to managing the risk of HMRC challenge and mitigating exposure to unexpected liabilities.

If you have any questions or concerns about the trivial benefit in kind exemption, please contact Lee Knight, David Williams-Richardson, or Susan Ball.