Saying thank you?

01 December 2020

Gemma Mullis ACIPP, CIPP policy and research officer, outlines issues to be considered by employers giving gifts

As Christmas and the festive period approaches employers may be considering giving employees a gift, perhaps to say ‘thank you’, particularly when reflecting on the year we have endured so far. Popular seasonal gifts include wine, chocolates, and turkeys.

Employers should make themselves aware of the tax implications that may arise as a result of their generosity, as giving an employee a gift that they are later taxed on may adversely affect morale.

Trivial benefits
Section 323A of the Income Tax (Earnings and Pensions) Act 2003 sets out a statutory income tax exemption for trivial benefits. If an employer provides a benefit to an employee (or to a member of the employee’s family or household), the benefit is exempt if all the following conditions are satisfied:

it costs the employer less than £50 to provide
it is not cash, or a voucher that can be exchanged for cash
it has not been given as a reward for performance at work
it is not detailed in their contract of employment.

Some of the above four conditions are easier to satisfy. A receipt or invoice will prove the cost of the gift purchased; and the employee’s contract will confirm whether the gift is or is not a contractual requirement. Proving that it was not given as a reward could be trickier if it is not given to all employees, so this may be something to be considered when providing gifts.

There is no limit on how many trivial benefits can be given over the course of the tax year to an employee; however, for directors of ‘close’ companies (i.e. limited companies with five or fewer shareholders), there is a limit of £300 that can be given to the person (or to a member of their household) in any tax year. (The £300 limit is per individual and per employer.) Where the employer provides benefits and considers them as trivial, suitable records must be kept demonstrating that the £300 limit has not been exceeded.

Although certain benefits provided under a salary sacrifice arrangement do not attract income tax liability, any other benefit that is given via a salary sacrifice arrangement, including those that would otherwise fall under the trivial benefit exemption, do attract liability. This is because in order for the exemption to apply the employee must not be entitled to the benefit as part of a contractual obligation (including under salary sacrifice).

Just because a gift is provided each year, or is provided to all staff members, does not mean that the employee has a contractual entitlement to it. However, if an employer provides their employees with benefits on a regular or frequent basis HMRC might well consider there is a link to the services.

If the cost of providing the benefit exceeds £50, the full amount is taxable, not just the excess over £50.

In determining the cost of the benefit for the purposes of the exemption, the VAT inclusive amount is used. Where the benefit consists of more than one item the cost of providing the benefit is the total cost.

A commonplace scenario occurs where the employer gives a gift to each worker paying an overall amount to a supplier without knowing the cost of each specific gift and whether the £50 limit is breached. In such a scenario, the average cost can be used but this averaging approach is not always permissible. See the Examples.

Detailed information about trivial benefits with further examples can be found in HMRC’s Employment Income Manual (https://bit.ly/38FPc55); see pages EIM21864–EIM21872.

PAYE settlement agreements
Employers can be more generous and offer employees more than the £50 available under the trivial benefit taxation rules, or indeed want to gift certain employees for going above and beyond, especially due to the current challenges the pandemic has posed to working life. Many employers would then wish to cover all of the associated income tax costs by doing so. For them to cover this cost, the employer will need to have a PAYE settlement agreement in place (PSA).

A PSA allows an employer to make one annual payment to cover all tax and National insurance contributions liabilities on items that are minor, irregular, or impracticable.

Although a PSA can be applied for at any time, the timing of the agreement will affect the items that can be included.

If a PSA is agreed before the start of the tax year, there are no restrictions on the expenses and benefits that can be included, other than the requirement to fit into one or more of the three categories above. If a PSA is agreed during the tax year, it is not possible to include items provided before the date of the agreement where either of the following applies:

PAYE has or should have been operated on the item, or
the item has been reflected in the employee’s tax code for the year.

If a PSA is agreed after the end of the tax year, but before 6 July, it is not possible to include any items provided during the tax year to which either of the following applies:

PAYE has or should have been operated on the item, or
the item has been reflected in the employee’s tax code for the year.

Once a PSA has been applied for and agreed, it will remain in place for each subsequent tax year until an employer requests to either cancel or make an amendment to it.

Payments due for a PSA must be paid by the 22 October after the tax year in which it applies (or 19 October if by post). Fines and interest may be payable if made after this date

Annual Christmas function
Given the pandemic’s effects on the economy, socialising and travelling, fewer if any annual Christmas parties are likely to be provided by employers this year. Page EIM21871 of the Employment Income Manual sets out how the trivial benefits exemption interacts with other exemptions such as that which might apply to annual functions.