Trivial benefits: Far from trivial
Tim Good explains how the new exemption for trivial benefits works, and why you should be telling your clients about this.
Myth and rumour
During our recent Finance Act lectures Mark, Giles and I have had a number of discussions around the country with delegates who want to know how far their clients can go with the new trivial benefits exemption. It’s very easy for Chinese whispers to generate considerable misunderstanding of what we can and cannot do under the new legislation [ITEPA 2003, s 323A]. It’s also helpful that HMRC has published draft guidance that goes into considerable detail and includes a number of examples.
The basic rule is that an employer can now provide trivial benefits such as a bunch of flowers, a box of chocolates, a meal out, without having to put it on the P11D and without any tax or national insurance for either employer or employee. The employer will also be entitled to claim income tax or corporation tax relief on the cost.
There are three key conditions:
- the trivial benefit must cost no more than £50
- the benefit must not be a reward for services or in any way contractual
- the benefit must not be cash or a cash voucher
The examples given in the HMRC draft guidance are, for the most part, sensible and very helpful.
Employer A takes a group of employees out for a meal to celebrate a number of birthdays. Five employees attend the meal at a total cost to employer A of £240. Individual employees make different menu and drink selections. Rather than undertake a detailed analysis of the bill you should accept that the cost per head is £48, reflecting an average amount of £240/5. The benefit of the meal can be covered by the exemption since the cost for each individual does not exceed the trivial benefit financial limit.
The legislation does not impose a limit on the number of trivial benefits that an employer can provide. One course delegate suggested during a discussion on this point that based on the different examples given in the guidance an employee could potentially clock up £12,500 a year of tax free benefits. This would equate to a £50 benefit on each of 250 working days in the year. In my book such a such a scheme would fall foul of the reward for services rule.
Suppose I pop into Lidl every so often and buy four £30 bottles of champagne to give to each of my employees. If I take them into the office and say “Hey guys – we’re hitting great delegate numbers on the 2017 courses programme so here’s a bottle of champagne”. That would be a reward for services and so would be taxable and NICable. But if I were to say “The sun is out, the sky is blue – I’m in a good mood and this is for you!” – then the champagne would be a trivial benefit.
Once we’ve explained the rules in the lecture room we are invariably asked whether director/shareholders can enjoy trivial benefits themselves, and the answer is “Yes!”.
But HMRC knows what directors can be like, so the legislation imposes an annual cap of £300 on exempt trivial benefits provided to a director or office-holder of a close company (including benefits provided to members of their family or household). Here is my favourite example from the HMRC guidance:
Company O gives bottles of wine each costing £30 to a director, to his wife who is a former director, and to their daughter on their birthdays. The daughter is not an employee or office holder of Company O, so the cost of her bottle of wine is apportioned between her father (a current director) and her mother (a former director). In respect of the daughter’s gift, £15 (£30/2) is allocated against the father’s annual exempt amount. The balance is allocated against the mother’s annual exempt amount under the amended employer-financed retirement benefits (EFRBS) regulations 2011 (Note: this amendment is has yet to be passed).
Brilliant, so much in just one example!
I plan to use the company credit card to buy 12 gift cards with £50 credit on each of them. Over the next few months I will occasionally give one of these to myself and one to the present Mrs Good (who is also a director of the company). These gift cards cannot be exchanged for cash.
How much will we save? Well each of us would have to pay £126 tax and NI on £300 of extra salary (assuming each is in higher rate bracket) and the company would pay £41 of secondary class 1 NIC. So between us we will save £335.
Worth doing? Ask your clients.
See Tim Good, Giles Mooney and Mark Ward speaking on the PTP Limited 2017 courses programme running in 14 venues across the UK including Cambridge, Leeds, Watford and Edinburgh.
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One of the founding partners of The Professional Training Partnership, Tim is also a director of PTP, PTP Interactive and Absolute Accounting Software and is chairman of The Tax Club. He is the author of three chapters in Tolley's Tax Planning and presenter of TAXtv.