With the holiday season right around the corner, so come the gifts.
No one wants to be a Scrooge about holiday gifts and parties, but companies in the U.K. should understand that there are opportunities to be generous to employees that won’t increase anyone’s tax burden. Be aware of the rules when it comes to trivial gifts, small gifts from third parties, and annual parties and events.
Referred to as a trivial benefit, in the past there was no general statutory limit below which small gifts would not be taxable.
However, as a result of recommendations made by the U.K. Office of Tax Simplification (OTS) in April 2016, we saw the introduction of a statutory exemption for trivial benefits.
For a gift or token to be considered a trivial benefit, it needs to meet certain parameters. The gift must not:
- Cost more than £50
- Be cash or a voucher that can be exchanged for cash
- Be a reward for the work or performance of an employee
- Be given as a result of contractual entitlement
Christmas gifts to employees can be a trivial benefit whether an employer is handing out turkeys, bottles of wine, or boxes of chocolate. For an employer with a large number of employees, the total cost of providing a gift to each employee may be considerable. This principle applies regardless of the total cost to the employer and the number of employees concerned.
Note: Aside from Christmas, small gifts to employees such as an arrangement of flowers to celebrate a birthday or birth of a child can also be classified as a trivial benefit.
When the trivial benefit exemption was introduced, HM Revenue and Customs (HMRC) predicted that many might see the exemption as an opportunity to utilize salary sacrifice arrangements. HMRC took measures in the legislation to prevent this.
As a result, where a trivial benefit is provided as part of a salary sacrifice arrangement, it will not be tax exempt. Plus, under the new Optional Remuneration Arrangements brought in from April 2017, it will need to be reported on Form P11D using either the higher of the salary being sacrificed or the amount paid to provide the trivial benefit. It can also be reported through the Full Payment Submission (FPS) if benefits-in-kind are being payrolled (taxed).
No annual limit exists for the number of trivial gifts that can be provided, so long as they fulfil all principles. The only exception is for directors of close companies (generally a U.K. resident company controlled by five or fewer individuals).In this situation, the number of trivial benefits provided to the director across a tax year (6 April to 5 April) cannot exceed £300.
Small Gifts Given by Third Parties
Commonly referred to as “goodwill gifts,” this is a situation where a small gift of goods is made to an employee (or a member of their family or household). These gifts will also be exempt from tax when the following conditions are met. The gift must not be:
- Provided by the employer or by a person connected with the employer
- Procured by the employer, nor a person connected with the employer directly or indirectly
- Made in recognition, or in anticipation, of particular services performed by the employee
- Made in cash or in vouchers or securities that can be converted into cash
- More than £250 in total cost to the donor in a tax year
The cost to the person buying the gift should include any value added tax (VAT) paid, whether or not it is reclaimable. It is important to be aware that, where the cost of a gift (or gifts) an employee receives from the same third party in a tax year exceeds £250, tax will be payable on the full amount of the gifts.
Annual Parties, Events
Is my holiday party taxable? This is one of the most commonly received questions for payroll this time of the year, but it isn’t exclusive to Christmas. Indeed, the rules apply to any social function that fulfils the following requirements. The party or event must:
- Cost £150 or less per head
- Be held on an annual basis (i.e., Christmas party or summer barbecue)
- Include an invitation to all employees
Where an employer has more than one location, an annual event that is open to all staff based at one location still counts within the exemption. Furthermore, an employer can also provide separate parties for different departments. As long as all employees could attend one of the events, this would fulfil the relevant requirement.
If more than one annual function is held and the total cost per head exceeds £150, only the functions that total £150 or less will be included within the exemption.
For example, your company held two events annually—one at Christmas and one in the summer—and all employees were invited to attend both events. If the Christmas party cost £110 per head and the summer sizzler cost £50 per head, this would total £160 and both events would not benefit from the exemption. It would be more beneficial for the exemption to be used to cover the Christmas party, leaving the charge for the summer sizzler to be reported (using the P11D or on the FPS if payrolling) for the employees who attended.
A common error made is where employers hold a one-off event and assume this is also covered by the exemption. Confusion may also arise with the use of the £150 limit. Guidance for employers is provided by HMRC in the form of “480 Expenses and Benefits—A Tax Guide,” as well as gov.uk, which includes basic guidance for employers and access to HMRC manuals with more technical detail.
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Samantha Mann, MAAT, MCIPPDip is Senior Policy and Research Officer for the Chartered Institute of Payroll Professionals (CIPP).