14 July 2023
Readers may remember that in the March 2023 edition of Tax Voice we highlighted a change to HMRC internal guidance, which now states that where employees are reimbursed (rather than the employer contracting and paying for) the cost of an otherwise qualifying eye test, spectacles or contact lenses, then in its view an income tax and National Insurance Contributions (NICs) liability arises.
HMRC has also now updated its employment income manual regarding the trivial benefits exemption to follow a similar line, stating that where an employer reimburses an employee in respect of an expense, any reimbursement cannot be covered by the exemption for trivial benefits provided by employers. In HMRC’s view, the reimbursement is not exempt as it is a cash payment that is taxable as earnings.
In this article, we comment on the validity of HMRC’s view and raise some points that employers may want to consider when deciding if the trivial benefits exemption can apply when preparing their 2022/23 PAYE settlement agreement (PSA) computations.
Trivial benefits exemption – a recap
The trivial benefits rules were introduced in April 2016 and provide a valuable exemption for certain minor and irregular benefits. Where the exemption applies, there is no income tax or NICs liability, and the employer does not have to report the benefit to HMRC. The legislation states that, to qualify as trivial any benefit must be provided by, or on behalf of, the employer to the employee and must satisfy the following conditions.
- The benefit must not be cash or a cash voucher.
- The cost of the benefit must not exceed £50 (including VAT).
- The benefit must not be provided under a salary sacrifice or contractual arrangement.
- The benefit must not be provided as a reward for services performed, or to be performed, by the employee.
HMRC’s position is based on the premise that the trivial benefit exemption cannot apply because one of the conditions for exemption, ie that the benefit cannot be cash (or a cash voucher), is not met. This stance impacts situations where an employee claims reimbursement for a benefit they receive themselves, but also, importantly, where an employee, for example a team manager, incurs costs for a benefit such as a £40 bunch of flowers for a bereaved or sick employee and claims reimbursement from their employer. This is so even where all the other conditions for exemption are met.
It is arguable whether:
a) HMRC’s approach is within the spirit of the intention of the trivial benefits legislation; and,
b) an employee being reimbursed for the cost of trivial benefits for his/her team is, in fact, receiving a ‘benefit’ themselves.
As HMRC has clearly stated its position in its manual update, employers will, however, need to carefully consider their approach when deciding what costs can be regarded as trivial benefits when preparing the PSA computations for 2022/23 and subsequent years.
An alternative interpretation
It is always important to take a step back and appreciate that the HMRC manuals set out HMRC’s interpretation of the legislation only, and that the courts have, over the years, concluded on several occasions that HMRC’s interpretation is incorrect. Businesses will need to make their own decisions as to the extent to which they take on board HMRC’s latest comments, but we believe that there are some points that could be considered as part of an alternative argument.
Reimbursement to an employee, where different employees are the beneficiary of the benefit
As noted above, the trivial benefits legislation is applicable to situations where a benefit is ‘provided by, or on behalf of, the employer’. An argument can therefore be put forward that, where employees are authorised or instructed by the employer to incur relevant expenditure, they are merely acting as an agent, and making the purchase on behalf of the employer. This position is strengthened, in our view, if the employer has a written expense policy and/or written evidence of authorisation or instruction for the employee to incur the expense in advance on behalf of the employer. Employers should therefore consider the wording in their current employee expenses policy and ensure that, wherever possible, written instruction and authorisation is provided on each relevant occasion.
We do believe though that, based on the latest HMRC guidance, where an employer makes a reimbursement to an employee for a cost incurred in providing a trivial benefit from which that same employee benefits, this should be treated as a taxable item that is also liable to Class 1 (employee and employer) NICs.
It is important to note that HMRC may challenge this alternative treatment and we have seen examples of cases where it has done so.
This latest update to the HMRC manuals clearly confirms its stance in relation to reimbursed expenses where the trivial benefits-in-kind legislation would otherwise apply.
Whilst HMRC’s position appears at odds with the intention of the legislation and will create inconsistent treatment for otherwise exempt expenditure, employers will need to make a difficult decision and apply a consistent approach when completing their PSA computations for 2022/23 and subsequent years.