Employees are your most valuable asset and it is important that they feel appreciated for all they do. However, celebratory gifts and parties to employees can have tax consequences, and the employer’s good intentions can be destroyed by an unexpected tax bill. Therefore, it can be helpful to structure staff welfare around the various exemptions available to employers.
Annual parties – An employer can spend up to £150 per head on annual functions without a taxable benefit arising, providing all employees (or all those at one location) are invited to attend. This limit must cover all costs including travel and VAT. It can be split across multiple events, but if one event costs more than £150, the whole cost will be taxable.
Free meals – Free but modest meals available to everyone on an employer’s premises, outside a salary sacrifice scheme, fall within an exemption. It is important to recognise that internal working lunches provided to only select employees will be taxable.
Trivial benefits – There is an exemption for trivial benefits provided to employees where certain conditions are met:
- The VAT inclusive cost does not exceed £50.
- The benefit is not cash or cash voucher (high street vouchers are acceptable).
- There is no contractual entitlement.
- The benefit is not provided in recognition of their duties.
This exemption applies where employers mark events such as birthdays, Christmas, births, deaths and sickness. “Thank you” gifts will not be exempt, as these would be in recognition of duties performed.
Long service awards – Benefits provided to employees to recognise long service are exempt where they meet the following conditions:
- It marks a period of at least twenty years’ service.
- There must not have been a similar award in the previous ten years (even if previously taxed).
- It must not take the form of cash, cash vouchers or shares (unless in the employing company). High street vouchers will qualify for the exemption.
- The taxable value of the award must not exceed £50 per year of service.
Benefits falling outside exemptions
Employers are not precluded from providing benefits falling outside an exemption, but the employer is required to report it to HMRC. In many circumstances, P11D reporting can be avoided by entering into a PAYE Settlement Agreement (PSA) with HMRC by 6 July 2020 for benefits provided in 2019/20 tax year. This allows the employer to settle the tax directly with HMRC, bypassing the employee.
It should be noted that a PSA results in the employer paying tax on a grossed-up basis, to recognise the employer is discharging the employee’s personal tax liability. It means that, for an employee paying tax at 40%, a benefit costing £100 will cost a settlement with HMRC of just under £90. Whilst this seems high, it may be a small price to pay to ensure good staff morale. Combining the use of the PSA with the available exemptions seems like the best compromise to mitigate the tax bill, whilst not skimping on staff welfare.
Author: Sue Thorn, Employment Tax Director, RSM
Sue is has more than 30 years’ experience in taxation and previously worked for HM Revenue and Customs. She conducts risk analysis and advises business on reducing risk, correcting errors and mitigating settlements with HMRC, as well as maximising efficiencies in remuneration and staff incentive planning.