Owner Kate Upcraft Consultancy Ltd
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Crackdown on trivial benefits exemption

HMRC has provided various “interpretations” of the rules for trivial benefits in the last three employer bulletins, as it apparently views those rules as too generous.

10th Dec 2019
Owner Kate Upcraft Consultancy Ltd
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From 6 April 2016, the government introduced a new exemption for trivial benefits (ITEPA 2003 s 323A). Tax advisors were encouraged by this new law as it provided welcome clarity of the value of benefits which could be classed as trivial, and the fact that gift vouchers were in scope if provided for appropriate reasons.

The introduction of the exemption had been delayed by a year because of concerns that the extension might be abused, particularly by close companies. To this end, close companies were given an annual exemption cap of £300, rather than unlimited trivial benefits which can be provided to employees, as long as each individual event meets the terms of the exemption.

Employer bulletins

The August 2019 Employer bulletin was a simple restating of the rules and contained nothing contentious.

The October 2019 Employer bulletin focused particularly on a sequence of benefits with two examples relating to employers providing a benefit over a number of months during a tax year. On each occasion that the benefit was provided the value was under £50, but the overall cost of the benefit exceeded £50, so the trivial benefits exemption was not appropriate. This was a reasoned interpretation of the legislation.

In the December 2019 Employer bulletin, HMRC went much further and said that any benefit provided regularly would fail the exemption as the employees would have a ‘legitimate expectation’ of its provision.

Legitimate expectation

This is the first time that a legitimate expectation condition has been referred to in relation to trivial benefits. The legislation in ITEPA 2003 s 323A says that one of the conditions for the exemption to apply is that: “the employee is not entitled to the benefit as part of any contractual obligation (including under salary sacrifice arrangements)”.

The brief employer guidance on trivial benefits simply says for the exemption to be appropriate: “it isn’t in the terms of their contract”. This is reiterated in the August Employer bulletin when HMRC says: “Is there a contractual obligation to provide the benefit? A good test is whether your employee would have legal grounds to object if you didn’t provide the benefit”.

What is a contractual obligation?

The December Employer bulletin references the employment income manual at EIM12976 (even though this is in respect to PILON clauses) to clarify a “contractual obligation”:

  • A side letter to the main contract document
  • A staff handbook
  • A letter of appointment
  • A redundancy agreement
  • An employer union agreement

All of the above would absolutely form the basis of a contractual term that the employee would have a grievance about if it was withdrawn.

The EIM does not use the phrase “legitimate expectation” but it seems that HMRC has decided that “legitimate expectation” can be considered under the final direction to HMRC staff given in the EIM which is to “consider all possible contractual sources”.

Is cake a meal?

The example in the December employer bulletin of a legitimate expectation of an employee is the provision of a cream cake every Friday.

I‘m curious how this cake provision interacts with the catering exemption in ITEPA 2003 s317. That exemption requires that a “meal” is provided to all employees at one location, but not on every day of the week. In fact, there is an example in EIM21673 of food provided only twice a week. EIM05231 defines a meal as “a combination of food and drink”.

If the employer provided a coffee and a cream cake every Friday, that would that be exempt under ITEPA 2003 s317 as catering? Equally, would employees have “legal grounds to object” if cakes were withdrawn?

Intention to simplify

As HMRC said in the August employer bulletin; “the main reason the exemption was introduced was to remove the administrative burden for employers in reporting the small amounts involved”.

It’s now becoming clear that what had seemed a pragmatic solution to the fact that many employers had never reported low-value benefits on an employee’s P11D or included them in a PAYE settlement agreement, has now become too well utilised. Presumably, it is the removal of items from PSAs that has piqued HMRC’s interest and the concern that there is a loss of tax.

SME experience

My experience with SMEs since the introduction of the exemption in 2016, is that they are blissfully unaware of the trivial benefit exemption so have either been including items in their PSA or completely ignoring them!

I’ve not heard of any employer being challenged on “legitimate expectation” during a compliance review, but on the basis of the last three issues of the employer bulletin, it certainly seems to be on HMRC’s radar.

I hope that common sense is restored to this subject so that there really is a reduction in the admin burden and that the Employment and Payroll Group get an opportunity to discuss ‘legitimate expectation’ with HMRC once purdah has been lifted.

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Replies (6)

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By memyself-eye
10th Dec 2019 10:47

Typical HMRC thinking - ignore vast sums being lost through evasion and concentrate on the inevitable consequences of their own scheme.
Think I'll award myself £50, just because I'm worth it.

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By SteveHa
10th Dec 2019 12:49

And as has to be pointed out far too often around here, HMRC's references to "legitimate expectation", much like all of their other guidance, does not carry the weight of the law, and is liable to be challenged at Tribunal.

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By flightdeck
11th Dec 2019 10:03

FFS. Cake? I'm glad they're on with the big issues.

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By johnfrancis
11th Dec 2019 10:30

I know of a company that was penalised for supplying bacon rolls to directors at board meetings, in order not to have to break for lunch. Half a dozen directors; six economical bacon rolls per annum. Tomato ketchup supplied by an individual director. HMRC didn't even want to discuss the issue of 'trivial benefits'.

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By cfield
11th Dec 2019 11:24

They're trying to have their cake and eat it. The removal of small benefits from P11Ds (by those who bothered to report them anyway) saved HMRC just as much time as the employers. In fact, trivial benefits were exempt from P11D reporting anyway under the extra-statutory concession. HMRC even used to cite examples like Christmas turkeys. Try buying a turkey for £50 now. This limit is obviously going to be allowed to wither on the vine, just like the 15p per day luncheon vouchers.

You'd think they'd have better things to do than worry about coffee and cakes. Usually this sort of fuss is only kicked up by individual HMRC staff trying to act tough, but this latest nonsense seems to be policy.

I think this is just another example of HMRC making up their own version of the law. My advice for owner/directors is to carry on claiming little treats of up to £50 a month but to document them as gifts. Make sure you use a company card though. Personal expenses don't count unless the receipt is in the company name, which is unlikely for restaurant bills and theatre tickets.

Clothes are a good thing to use the benefit on. One of my clients organises corporate events and is told by the clients what clothes/shoes to wear, even how to do her hair. They don't count as uniform unfortunately so are non-tax deductible under the everyday wardrobe rule, but they can be claimed as trivial benefits (if under £50) and she can get the VAT back as well.

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By whitevanman
11th Dec 2019 19:18

Contributors to Aweb often cry out for tax simplification. The treatment of trivial benefits was one move towards such but what happens? Advisors immediately start looking for ways in which they can take advantage (for their clients) by, for example, claiming £50 every month. Is it any wonder therefore that HMRC responds as it has? Will it surprise anyone if the measure is removed or becomes too burdensome to work? Simplification has to work both ways. If 1million people each get an extra £600 per year, tax free, the cost is anything but trivial. Remember the loan charge?

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