Are You Making The Most of The Tax-Free Exemptions for Staff Gifts and Other Staff Entertaining

In this article we consider the extent to which the costs of providing your employees with ad-hoc gifts or entertaining them fall within the tax-free exemptions permitted by HMRC. We then consider an alternative to your employees being taxed on the value they are deemed to have received, should it be the case that the value conferred to them is not exempt from tax.

What exemptions are available for staff entertaining and gifts?

Most employers are aware of the £150 per head exemption which is available for a Christmas party or similar annual function, but many remain unaware of the exemption for ‘trivial benefits’ which was introduced in April 2016. Under this exemption, no tax or national insurance is due on staff gifts or entertaining costs if:

• The cost of the benefit does not exceed £50 per head (note that this is per event and not per year, although there are restrictions for directors of close companies).
• The benefit is not cash or a cash voucher so gift cards with a value of £50 or less will count as a trivial benefit as long as they cannot be exchanged for cash.
• The benefit is not provided as part of any contractual obligation (including under salary sacrifice arrangements).
• The benefit is not provided in recognition of services performed.

To illustrate how this might work in practice, HMRC’s guidance provides the following helpful examples:

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.

Employer B provides each of its 100 employees with a turkey at Christmas and the total bill comes to £4,500. There are a variety of sizes. Because the employer has made a bulk order, the turkeys have not been priced up individually but would cost in the region of £40 to £60 each. Employees are able to choose which bird they have. Rather than undertake a detailed analysis of the individual benefits, you should accept that the cost per head is £45, reflecting an average amount of £4,500/100. The benefit can be covered by the exemption since the cost for each employee does not exceed the trivial benefit financial limit.

As mentioned in the bullet points above there is no limit on the number of trivial benefits that an employer can provide during the tax year and the only restrictions are for close company directors for whom the total value of benefits that can be treated as exempt is capped at £300 per year. The trivial benefit exemption can cover costs incurred on birthdays, religious days and simply any day at all so long as the reason is not to recognise an employee’s work.

PAYE Settlement Agreements

If the costs of providing your employees with ad-hoc gifts or entertaining them are not covered by the available exemptions, the amounts in question will generally be apportioned between them on a just and reasonable basis and reported to HMRC on annual forms P11D. The tax on the value attributed to each employee will then be payable by them. However, in certain circumstances a PAYE Settlement Agreement (PSA) can be used to allow an employer to pay the tax on behalf of employees who are in receipt of such ‘benefits in kind’.

Why would an employer use a PSA?

A PSA will often be sought in circumstances where, without one, an unexpected tax charge would be imposed on an employee who receives a gift or is being entertained and this would be likely to undo the goodwill generated by the employer’s benevolent gesture. [Whilst the majority of employees will accept that they need to pay tax on the cost of their medical insurance or gym membership benefits, most will not feel the same way about having to pay tax on the costs attributable to them where, for example, they have received a benefit by attending a staff party which is not covered by the available tax exemptions.] Without a PSA, a proportion of these costs would be taxable on an employee and this could conceivably lead to ill-feeling within the workplace.

What can be included?

The benefits and expenses to be considered must either be minor (e.g. vouchers or incentive awards), irregular (e.g. staff events or certain relocation expenses) or it must be impractical for them to be reported in the usual way via PAYE or the P11D, perhaps because the nature of the benefit provided makes it difficult for the cost to be allocated between employees.

How is the amount payable calculated?

The charge is calculated by treating the benefits in question as amounts which have been received in the employee’s hands net of the appropriate tax and national insurance deductions. These deductions are what need to be calculated and paid over to HMRC and in order to do this, a ‘grossing-up’ exercise is required which takes account of the marginal tax rate of the employee in question.

By way of example, if an employee who pays tax at the basic rate (20%) is gifted a voucher worth £100, the tax and national insurance payable by the employer would be calculated as follows:

• The £100 would be grossed-up at the employee’s marginal rate of tax to £125, i.e. £100 x 100/80.
• Tax would be payable at 20% on this grossed-up amount giving rise to a charge of £25, i.e. £125 x 20%.
• The same grossed up value would be used to determine the national insurance contributions, which are payable at a rate of 13.8%. The charge for national insurance would therefore be £17, i.e. £125 x 13.8%.

The total amount payable by the employer comes to £42 (i.e. £25 + £17), or put another way, is 42% of the value of the benefit provided. This is obviously not cheap, and the cost becomes more expensive when the employee in question pays tax at a higher rate. The current effective rate of tax and national insurance for the employer in such circumstances are as follows:

• Higher rate (40%) taxpayer – 90%
• Additional higher rate (45%) taxpayer – 107%

When deciding whether to use a PSA, an employers will need to consider whether the significant costs involved outweigh the loss of goodwill.

When does an employer need to apply to use a PSA?

Generally, HMRC will allow a PSA to be used when the agreement is in place by 6 July following the end of the tax year in question.