Q: My client is director of a company and would like to provide a Christmas gift to his employees. He understands that this may create a taxable benefit on his employees. Please may you explain the tax treatment for different gifts?
A: When an employer gives a gift to an employee, it may give rise to tax and national insurance obligations. This will depend on whether the employee is a director, how much they earn and what type of gift it is (that is, whether it is a cash gift/bonus, or goods).
Cash bonus
If an employer provides an employee or director with a cash bonus then the full amount is taxable, irrespective of who receives it. If something is readily convertible into cash then it is treated as cash for tax purposes, for example, vouchers which can be readily converted are treated as cash.
Gifts
The tax treatment of the gift provided to the employee or director is determined by the nature of the gift. Often the typical form of an employer’s Christmas gift will fall under the ‘trivial benefits’ rules below. These might be gifts in the form of hampers or a Christmas turkey.
Goods with no resale value
If the gift provided to the employee has no resale value or no market for resale then it is taxed as a non-cash benefit and subject to Class 1A NIC. The advantage of these gifts is that they have no tax consequences for lower paid employees (those earning at a rate of less than £8,500 a year).
Goods with resale value
If there is a market for the resale of the gift then there are potentially tax and reporting requirements for both lower and higher paid employees. For lower paid employees, the resale value of the gift represents ‘money’s worth’ to the employee and should be included in earnings. For other employees, the amount chargeable is the higher of the cost to the employer under the benefits code or the resale value.
Trivial benefits
There is no lower limit on the value of a gift which means it becomes non-taxable. HMRC accepts that, for practical reasons, certain small benefits may be ignored. This means that there may be no tax consequences of very low value gifts. It is possible to apply to HMRC for an agreement that the gifts provided are trivial and therefore have no tax, NIC or reporting requirements if:
• There is a very low cost in providing the gift
• The gift is for general welfare purposes
• The resource cost in administering the tax and NIC is disproportionate to the value of the tax/NIC
In order to reach agreement with HMRC, the employer can write to the customer relationship manager or customer co-ordinator for larger employers or the PAYE office for smaller employers. The letter should include details of the nature and frequency of and reasons for the gifts to be provided.
The government intends to introduce a statutory exemption for trivial benefits in kind costing less than £50 from 5 April 2016, with legislation being included in the Finance Bill 2016.
PAYE Settlement Agreement
Most employers that provide gifts to their employees do not want the employee to suffer a tax consequence on it. In these cases the employer should apply for a PSA which allows the employer to pay the employee’s tax on their behalf.
Ben Chaplin is managing director of Taxwise
