As is often the case when it comes to paying tax, the devil is in the detail, writes taxation specialist David Wright

Benjamin Franklin famously stated that “in this world nothing can be said to be certain, except death and taxes.” However, trivial benefits – a handy tax exemption – partly disproves Franklin’s statement and may be of benefit to all in a workplace. 

In essence, the trivial benefits exemption allows employers to provide small gifts and other perks to employees without either party having to pay tax or National Insurance Contributions (NICs).

Employment benefits

Benefits in kind are non-cash items provided to employees by their employer and are often just referred to as ‘benefits’. Common benefits include the provision of a company car or van, private medical insurance, or living accommodation.

Employees who receive these from their employer will generally pay income tax on their value. While there is no NIC charge on the benefit for the employee, the employer will pay a special type of NIC every year on the value of taxable benefits provided to its employees.

How are trivial benefits different?

Trivial benefits are not subject to tax or NICs for either the employee or the employer. They allow employers to provide employees with small gifts, treats and general perks without creating a tax or NIC cost for either party. But as is often the case with tax, the devil is in the detail.

The main conditions for a benefit to qualify as trivial are that:

• The cost to the employer of providing the benefit has to be £50 or less per recipient 
• It can’t be a reward for work done by the employee, or an incentive for future work
• It can’t be in the form of cash or cash vouchers
• It can’t be provided as part of contractual arrangements, including salary sacrifice. 

Pitfalls to watch out for

Used correctly, trivial benefits can help employers take care of their employees while building a happier, more productive working environment.

But while the rules might appear straightforward at first, it’s important to look at some of the hidden quirks, which can catch out a well-meaning employer.

Cost

The £50 limit applies to the cost including VAT of providing the benefit. If the cost exceeds £50 per employee, the entire value is subject to income tax for the employee and NIC for the employer, like a normal benefit.

So, a £60 bottle of champagne given to an employee on their birthday would result in tax and NIC being charged on the full £60, not just the £10 excess over the trivial benefits exemption.

The value of benefits can be linked. For example, in May an employer gives an employee a £30 gift voucher, which is not exchangeable for cash.

This qualifies as a trivial benefit. A month later, the employer tops up the voucher by £20 and then in September tops it up again by a further £15.

The £20 top up qualifies as a trivial benefit as the cost of the voucher is still within the £50 limit. But the top up in September will not qualify as a trivial benefit because the total cost to the employer of proving the voucher now exceeds £50.

If a benefit is provided to a number of employees and it isn’t practical to work out the cost per employee, then the £50 cap applies to the average cost per employee instead. Only non-cash vouchers qualify for the exemption.

Frequency

Providing a gift to employees annually should not make it a contractual entitlement. For instance, a Christmas hamper that costs the employer £50 or less can be provided to employees every year and still qualify as a trivial benefit.

Providing gifts on a very frequent basis (e.g. a different £50 gift voucher every month) is not specifically excluded. However, the exemption is intended to cover occasional gifts and gestures of goodwill.

It is likely that very frequent gifts to employees could be subject to challenge by HMRC. It may argue they were a reward for work done by the employee, or that the frequency created an expectation by the employee that they could demand that the employer keep providing the benefit.

Reward for services

The trivial benefits exemption is not available where gifts or perks are provided as a reward for services, or to incentivise employees to work harder.

A lunch for sales representatives who have reached their target will not qualify as a trivial benefit, for example. But a lunch to celebrate the end of a busy year would.

Employee buys a gift

An employee asked by an employer to buy a trivial gift for a colleague – and is reimbursed – will be liable to tax on the reimbursement for that gift as normal pay even though the company or recipient won’t be.

This can be avoided if the employer buys the gift directly. Directors A specific rule applies to directors of close companies – i.e. companies that are 50 per cent or more owned by their directors, or by five or fewer shareholders.

The cost of trivial benefits that close company directors can receive from their company is capped at £300 per tax year.

This includes the value of trivial benefits received by members of the director’s household (say, partner, children, parents), unless they themselves are directors or employees of the company.

Take-away message

Used properly, the trivial benefits exemption can help boost staff morale and build loyalty between employers and employees.

However, the pitfalls require careful consideration, and employers would be well advised to keep records of the costs of all trivial benefits provided in case HMRC raise questions later.

David Wright is a technical officer at the Association of Taxation Technicians