At this time of year many employers will be considering the tax and National Insurance contributions (NIC) treatment of the non-cash benefits they provide to employees. As part of this thought process, employers may also be considering whether those non-cash benefits qualify for the statutory trivial benefit in kind exemption, which took effect from 6 April 2016 and has now been with us for two complete tax years.
When does the exemption apply?
If an employer provides a benefit to its employees, the benefit is exempt from tax 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 the average cost per employee does not exceed £50 if the benefit is provided to a group of employees and it is impracticable to determine the cost per employee). 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.
What can go wrong?
While the exemption appears straightforward, this is not always the case and we are increasingly seeing cases of it being applied incorrectly. Six common mistakes are as follows.
- Applying the exemption on a blanket basis to all benefits which cost £50 or less, regardless of the purpose of the expenditure. It can only be applied 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.
- Applying the exemption without first identifying whether the employee or director is contractually entitled to the benefit.
- Not considering VAT 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.
- 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 which individually qualify, is capped at a total cost of £300 per annum.
- Applying the exemption to employees’ and directors’ personal bills. It does not apply to cash or cash vouchers and when an employer pays an employee’s or director’s personal bill, this is treated as cash and does not qualify for exemption, even where the other conditions are met.
- Applying the exemption to benefits which are provided on a frequent or regular basis. It is HMRC’s view that employers only provide benefits which are unconnected to performance on an irregular or infrequent basis. When an employer applies the exemption to benefits which are provided regularly or frequently (for example month end drinks), 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. Employers should give particular 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), as this is often the condition which is most difficult meet and the purpose of providing the benefit may not always be initially clear. Employers should also ensure that any documentation referring to the benefit does not breach the contractual obligation condition before the exemption is applied.
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 employer’s NIC from the employer, together with a penalty and interest charges. Taken across the workforce and multiple tax years these unexpected liabilities can be significant. Taking reasonable care when applying the exemption is therefore key to managing the risk of HMRC challenge and mitigating exposure to unexpected liabilities.