Trivial benefits exemption: a timely guide for contractors

Contractors, with Christmas just around the corner, you may be thinking about giving gifts to employees.

If so, have you considered the tax implications of such gifts? Well, using HMRC’s trivial benefit exemption is sure to appeal to business-owners and employee alike, writes Marc Seymour, director of contractor accountants Taxevo.

What are trivial benefits?

A statutory exemption for trivial benefits was introduced by HMRC in April 2016 to allow a limited company to provide trivial benefits of up to £50 a time to employees without any tax or national insurance implications, and without having to let HMRC know.

The conditions

In order to qualify for this exemption, the following conditions must all be satisfied:

• the cost of providing the benefit does not exceed £50
• the benefit is not cash or a cash voucher
• the employee is not entitled to the benefit as part of any contractual obligation (including under salary-sacrifice arrangements)
• the benefit is not provided in recognition of particular services performed by the employee as part of their employment duties (or in anticipation of such services)

Where the employer is a ‘close company’ and the benefit is provided to an individual who is a director or other office holder of the company (or a member of their family or household), the exemption is capped at a total cost of £300 in the tax year.

A ‘close company’ is defined by HMRC as a company which is under the control of:

• five or fewer ‘participators,’ or
• any number of participators if those participators are directors, or
• more than half the assets of which would be distributed to five or fewer participators, or to participators who are directors, in the event of the winding up of the company

For most small limited companies, ‘participators’ will just mean shareholders.

If any of these conditions is not satisfied then the benefit is taxed in the normal way, subject to any other exemptions or allowable deductions.

The exemption applies equally to benefits provided to the employee or to a member of the employee’s family or household.

The cost

One of the conditions that has to be satisfied is that the cost of providing the benefit does not exceed £50. If the cost of providing the benefit exceeds £50, the full amount is taxable, not just the excess over £50. You should use the VAT inclusive amount to determine the cost.

Be careful that the cost does not exceed £50, as by going over this by even one pence means the full amount is taxable. So keep it to £50 -- or less.

Sometimes there may be times when the benefit is provided to a group of employees and it is not practical to work out the cost per person. In these circumstances, use the average cost per employee to meet the £50 cost limit. You need to use the number of employees who receive the benefit and the total cost to calculate the average.

What can’t be claimed

As with any exemption, there are certain things that do not qualify:

• The gift cannot be cash or a cash voucher. However, benefits provided in the form of a non-cash gift voucher can be covered by the exemption
• The employee is not entitled to the benefit as part of a contractual obligation (including under salary-sacrifice). If a gift is provided to employees each year, for example a Christmas or birthday gift, it does not mean there is a contractual entitlement
• The benefit should not be provided in recognition of particular services performed by the employee. That means if the benefit has been provided as a reward for services it should be taxed in the normal way.

Example 1

Lucy runs her own limited company. She is the only director and shareholder and therefore it is a ‘close company.’ She is aware of the trivial benefit exemption and uses it to buy herself a gift voucher every other month for £50. This means that each item is within the £50 limit and she is below the annual exempt amount. She enjoys the benefits tax free, and her company gets corporation tax relief on the amount spent.

Example 2

Paul’s employer likes to treat its staff well to keep them onside and maintain morale (unlike a hefty quarter of bosses and line managers!) The company Paul works for are not a ‘close company.’ Once a month, the company provides lunch for all staff members at a cost of £10 per head. This falls within the £50 limit and as the company is not ‘close,’ the annual cap of £300 does not apply.

Final thought

It is important to remember that these trivial benefits are in addition to other benefits that can be claimed through a limited company. At this time of year, you should consider the cost of an annual staff event. Up to £150 per employee per year is allowable but be aware that this cost must not be exceeded. If you do spend over the threshold, then the full cost is disallowed.

So there we have it, two valuable HMRC-approved benefits that limited companies can use this Christmas, albeit carefully so as to avoid a nasty surprise from the taxman in 2019.