Recreational and sporting facilities made available by an employer to employees are exempt from tax and Class 1A National Insurance contributions (NIC) (the ‘exemption’) where the facilities provided meet all the following conditions.
- They are available generally to all the employer’s employees.
- They are not available to members of the public generally.
- They are used wholly or mainly by individuals whose right to use them is employment related.
While the conditions to apply the exemption seem straightforward, the contentious issue concerns the word ‘facilities’, which is not defined in the legislation and which HMRC has been known to interpret very narrowly.
How does HMRC interpret the word ‘facilities’?
For the purpose of the exemption, HMRC’s view is that the word facilities means only tangible facilities such as a gym and/or gym equipment.
Based on HMRC’s interpretation, sporting or recreational services made available by the employer do not qualify as facilities under the exemption. This means that services made available by the employer, such as group employee fitness sessions and yoga classes, do not (in HMRC’s view) qualify. This is the case, even where these services take place in an employer provided facility which does satisfy the exemption. It is possible, however, that the exemption for trivial benefits in kind could apply to these types of services if the conditions for that exemption are satisfied.
This HMRC interpretation of facilities does not appear to reflect the dictionary definition, which includes a building, service, or piece of equipment provided for a purpose. Applying the ordinary meaning of the word, which should apply in the absence of a statutory definition, it seems unreasonable that the exemption cannot be applied to employer provided sporting or recreational services which ultimately serve the same function and purpose as, for example, an in-house gym.
What about memberships at outside gyms and leisure facilities?
The exemption does not apply to memberships of outside gyms and leisure facilities that are available for use by members of the public generally.
Where an employer meets the cost of such memberships for employees, the cost should be taxed and subjected to NIC as earnings or as a benefit in kind.
Are employer provided facilities which qualify for the exemption treated differently if they are provided in conjunction with salary sacrifice?
Yes, they are.
The optional remuneration arrangements (‘OpRA’) rules take effect if an employee gives up a right (or a future right) to receive an amount of earnings in return for a benefit, or agrees to be provided with a benefit rather than earnings.
If employer provided sporting or recreational facilities that qualify for the exemption are made available to an employee under a salary sacrifice arrangement, the OpRA rules apply, the exemption is effectively disapplied and the taxable value of the benefit in the tax year is the greater of:
- the amount of earnings forgone by the employee in return for the benefit in the tax year (ie the amount of salary sacrificed in that tax year); and
- the benefit in kind value normally determined under the relevant legislation, which will be nil if the benefit is otherwise exempt from tax.
The effect of the OpRA rules is that a chargeable benefit in kind will arise in respect of the, otherwise exempt, sporting and recreational facilities made available by the employer. The value of the benefit will be the amount of the salary sacrificed in the tax year. This is the value which will be liable to tax and employer’s NIC.
What should employers do?
Employers making health and wellness benefits available to employees, including recreational and sporting facilities, should carefully consider the employment tax and NIC treatment. Applying an exemption incorrectly could potentially expose an employer to underpaid liabilities, including tax, NIC, HMRC interest, and HMRC penalty charges.
If you have any questions regarding the above, or if you have concerns about the employment tax and NIC treatment of the health and wellness benefits your organisation makes available to employees, please contact Lee Knight or Simon Adams.