26 July 2023
PAYE Settlement Agreement (PSA) season is upon us, and many employers are identifying the benefits which need to be reported in their PSA calculations. Employers wishing to apply the trivial benefit exemption to benefits should ensure that the benefit qualifies. An issue that is often overlooked is where the cost of such an item is reimbursed by the employer.
What is the trivial benefit exemption and when does it apply?
Where a benefit is provided by, or on behalf of an employer to its employees, the benefit is exempt from tax and National Insurance Contribution (NIC) as employment income 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)*;
- 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); and
- the benefit is not provided in recognition of services performed or to be performed by the employee as part of their employment duties.
*Where the employer is a close company, and the benefit is provided to an individual who is a director or other office holder of the company (or a member of their family or household) the exemption is capped at a total cost of £300 in the tax year.
Read more on the trivial benefit exemption in our previous article.
What is the issue with reimbursing employees?
There are several instances where the interaction between the reimbursement of expenses and the benefits code can result in different tax treatments depending on how the transaction/purchase occurred.
For the trivial benefit exemption HMRC’s view, is stated in EIM21866, where an employer reimburses an employee for an expense that the employee has incurred on their own account, this cannot qualify as a trivial benefit.
This is because the second condition (see above) is not met as the benefit must not be cash (or a cash voucher) and reimbursing an employee for an item they have purchased themselves is a payment of cash, not the provision of a non-cash benefit, in HMRC view.
The reimbursement is instead a cash payment within s70 ITEPA 2003 for income tax purposes and earnings within s3(1) Social Security Contributions and Benefits Act 1992 for National Insurance contributions (NICs) purposes and should therefore be taxed and subject to NIC through the payroll, subject to any deductions that might otherwise be due.
For example, flu vaccine vouchers (using a third-party scheme provider) given to employees can qualify as a trivial benefit. However, directly reimbursing an employee who has paid for their own vaccine results in a benefit subject to income tax and Class 1 NICs.
What about if the employee who receives the reimbursement is not the recipient of the benefit?
Where the employee who receives the cash reimbursement is not the recipient of the benefit, HMRC’s view still appears to be that the trivial benefit in kind exemption does not apply.
For example, a £40 bunch of flowers given to a bereaved or sick employee by an employer could qualify as a trivial benefit for that employee. However, if a colleague makes the purchase and is reimbursed, this might not.
In certain circumstances HMRC may also not accept that a deduction under s336 ITEPA2003 against the expenditure incurred by the employee receiving the reimbursement is valid. For example, staff entertainment may not be incurred wholly, exclusively and necessarily in the performance of the employee’s duties.
What should employers do?
Where employers have reimbursed expenses that they consider to be trivial benefits they should consider if any other exemptions or arguments apply which allow the amount to be exempt apply.