Can directors and employees receive gifts from a limited company?

Like many tax questions starting with the word ‘Can,’ the answer to ‘Can directors and employees receive gifts from a limited company’ is ‘Yes.’ But there are caveats and so there may be HMRC implications, writes Graham Jenner of accountancy firm Jenner & Co.

Good things come in small packages

For the purposes of this article, we are talking about relatively small gifts that directors and employees might want to receive.

Large gifts -- for example a deposit towards the purchase of a house, should be considered in the light of the liquidity of the company. If the company were to subsequently go into liquidation, the justification for a transaction like this may well be looked into in detail by the liquidator.

Returning to the focus of this article, if there are small gifts in the offing, then we need to consider the tax and national insurance impact of those gifts.

Very small gifts and the trivial benefits rule

So what do I mean by ‘very small’ gifts? Well, they might be covered by the ‘trivial benefits’ rules:

As a limited company director, you don’t have to pay tax on a benefit for your employee if all of the following apply:

• it cost you £50 or less to provide
• it isn’t cash or a cash voucher
• it isn’t a reward for their work or performance
• it isn’t in the terms of their contract

This is known as a ‘trivial benefit’. In which case, you don’t need to pay tax or National Insurance or let HMRC know.

Conversely, you’ll have to pay tax on any benefits that don’t meet all these criteria.

So, you can see that a gift worth £50 or less given for an employee’s birthday, say, which isn’t cash or a cash voucher, would still fall within the ‘trivial benefits’ criteria.

Importantly, while the company probably wouldn’t make the offering of the gift if the person wasn’t an employee, it isn’t a reward for their work or performance.

For directors of ‘close companies’ (defined as a limited company run by five or fewer shareholders), there is a limit on such items of £300 in a tax year.

Gifts outside ‘trivial benefits’ criteria

A gift might take the form of an outright gift, or it might be transferring (generally selling) something to an employee or director at an undervalue.

The general rule is that such a gift is taxable on the recipient. It is paid because they are an employee and is therefore part of their ‘remuneration package’, whether contractual or not. 

For example, gifting an employee a holiday could be seen as the equivalent of gifting the employee the cost of the holiday, and the employee using that money to pay for the holiday.  In that scenario, the payment of the ‘bonus’ would be taxable, so it is not unreasonable that HMRC’s starting point is that the gift of the holiday is similarly taxable.

Otherwise, it would be possible to pay large parts of a person’s remuneration, especially bonuses, in the form of non-taxable gifts!

Value of the gift for tax purposes

The value of a gift of money or ‘money’s worth’ is easy to value.

However, what about gifting an asset?

If the asset is new, then the value for tax purposes is the higher of its second-hand value and what the company paid for it.

If the asset is a used or depreciated asset (and has not previously been provided as a benefit for the employee’s use), the value is its second-hand value, when you transfer it.

Where the asset has previously been provided as a benefit for the employees use, the value is the higher of:

• how much the asset is worth second-hand when you transfer it
• how much the asset is worth when you first provided it as a benefit, minus any amount that was subject to tax or National Insurance while you were providing it as a benefit

For cars, vans, bicycles and cyclists safety equipment, living accommodation, then only the second hand value needs to be considered.

If the employee makes a payment towards the asset, the amount of the payment is deducted from the value of the gift. Clearly, if they pay the full value of the gift (or more) based on the above valuations, then there is no gift and, so, no tax or national insurance to pay.

Purchase of an asset by the company from a director or employee

If the company pays more than the market value for an asset purchased from an employee, then the excess is considered a ‘gift.’ 

Otherwise, this could be a simple method of paying disguised remuneration to an employee. This is treated as a gift of money.

Tax and National Insurance on the value of gifts

Where you sell or give away an asset, you must declare the gift on form P11D (‘return of expenses and benefits’) and pay Class 1A National Insurance on the value of the gift. The employee will pay tax on the benefit. N.B. The employee does not pay national insurance on the gift.

Where the gift is money, or money’s worth, including vouchers exchangeable for cash, the value is added to the employee’s other earnings and tax and national insurance should be accounted for through PAYE in the normal way. N.B. In this case, the employee does pay national insurance on the value of the gift.

Where the gift is a holiday, it is slightly more complicated. A holiday voucher is treated as a non-cash voucher, as above. 

Payment to the employee of the amount of a holiday they have arranged and paid for, is treated as earnings, as above. If the employee arranges the holiday, but the company pays for it directly, you report the gift on form P11D, account for Class 1 National insurance (but not PAYE), and the employee will pay tax on the value. If you arrange and pay for the holiday directly, which is much more akin to providing a gift, then the company must report it on the P11D and pay class 1A National Insurance and the employee will pay tax on it.

Finally, is it worth it?

Where the gift is money or money’s worth, then there is generally no benefit. Where the gift is something else, depending on the gift, then if the employee does not have to pay National Insurance on it, there is a saving compared to paying the same amount in money. When in doubt talk it out – not with the intended recipient of the gift, with your accountant!