Applying the trivial benefit in kind exemption

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

HMRC provides guidance on the trivial benefit rules at EIM21865 onwards. HMRC’s Employer Bulletins also provide guidance on its interpretation of the rules.

The October 2019 Employer Bulletin focused particularly on a sequence of benefits, with two examples relating to employers providing a benefit over a number of months during a tax year. On each occasion that the benefit was provided the value was under £50, but the overall cost of the benefit exceeded £50 so the trivial benefits exemption was not appropriate. This was a reasoned interpretation of the legislation.

In the December 2019 Employer Bulletin, HMRC went much further and said that any benefit provided regularly would likely fail the exemption because the employees would have a ‘legitimate expectation’ of its provision, which in HMRC’s view means it is provided under a contractual obligation. 

Problems also arise for many employers when they consider HMRC’s interpretation at EIM21866: ‘Where an employer reimburses an employee in respect of an expense that would not otherwise be deductible, any reimbursement cannot be covered by section 323a ITEPA 2003’ ie the trivial benefit rules. 

The reimbursement is not exempt from tax under this section because this fails the condition that says it can’t be in cash. HMRC’s view is that it is a cash payment that is taxable as earnings within section 70 of ITEPA 2003 (see EIM20603), subject to any deduction that might otherwise be due (see EIM31620). 

For example, if an employer makes a flu jab benefit available to employees, that might be covered if the other conditions are satisfied. But if an employee arranges their own flu jab and claims reimbursement from their employer, that reimbursement can’t be covered by the trivial benefit in kind exemption.

HMRC’s guidance at EIM21866 could also mean that where, for example, staff entertaining or staff gifts purchased and claimed as a reimbursement by one employee, reimbursement cannot be a trivial benefit regardless of the amount, and strictly speaking should be subject to tax and Class 1 NIC via payroll.  

This is something many employers do not consider, which basically means they may have got their treatment of the benefit wrong.  

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.