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Can limited company directors claim trivial benefits?
Many small business owners understand that it’s possible to provide employee benefits to their team and themselves as directors, either as part of their remuneration package or as a salary sacrifice whereby the employee takes less pay via salary sacrifice.
The tax treatment on these benefits can vary greatly based on the specific type of benefit, while some are tax free others will have different taxes applied. Ultimately if you imagine a scenario where a business provides everything an employee needs instead of paying them a salary, then HMRC would lose out on a lot of tax and national insurance contributions.
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What is a trivial benefit?
While many benefits incur tax charges for the recipient, there is actually an exemption for certain types which means that they are tax deductible for a business, but also not considered a taxable benefit for employees.
Benefit in Kind Tax
So the tax authorities don’t lose out on when employee and directors benefits are provided, there are rules in place to collect tax on many benefits that can be provided to employees and directors.
Despite these benefit in kind taxes, it can still make sense to provide many benefits as the business can achieve significant corporate discounts by bulk buying, but also there can often be lower rates of tax and national insurance compared to those a salary would attract.
Perceived Value
It is often also the case that the perceived value that a member of a team places on a benefit provided to them is far greater than the cost of the actual benefit, so benefits and gift can be a very financially efficient way to keep them motivated for a business.
Trivial benefits criteria
I’m referring to the trivial benefits exemption which allows you to provide a gift or small benefit to your employees, the trivial benefits rules are:
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Must be under £50
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Isn’t cash or a cash voucher
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Isn’t an ongoing cost
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Isn’t a reward for work or their performance
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Hasn’t been contractually agreed
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Can’t be part of a salary sacrifice arrangement
Let’s have a closer look into what these rules mean in practice and how you can avoid accidently breaking them. All these criteria apply, so there is no threshold to meet, the employer gifts are either tax exempt from tax or they are not.
Must be under £50
While it might sound simple it is worth being careful in terms of how you measure the value of the gift, especially when you consider that as a business owner you are often accustomed to considering costs without VAT applied as you can reclaim it.
The rules clearly state that the amount the value of the gift can’t exceed is £50 including VAT and that it is an all or nothing limit. This means that going over by a penny will prevent the exemption from tax applying and require the employee to pay tax on it as a benefit in kind.
However from reading further into this article you will also find that multiple trivial benefits can be provided to employees in a tax year.
In certain cases where company benefits are provided to a group of employees at the same time, it might be necessary to work out the average cost per employee as you may end up bulk buying. If the total cost is over £50, that’s okay as long as the individual benefit cost is under the threshold.
Isn’t cash or a cash voucher
You can’t just give your employee a £50 note and enjoy the exemption from tax and national insurance, there is also a restriction from providing a voucher that can be refunded into cash.
Many companies do have gift cards for sale that are considered to be a non cash gift voucher and are allowed under the trivial benefits rules as they can’t be converted to cash or have unutilised balances refunded as cash.
For example giving an employee an Amazon gift card of £50 or less would be tax exempt, however if you gave them two Amazon gift cards of £50 each then HMRC would combine them when working out the total value and then disallow them as a Trivial benefit as the total came to £100.
If you do wish to gift employees gift cards worth more than £50 in any tax year, then it is important to ensure that you buy them from multiple retailers. For example, while two £50 Amazon gift cards aren’t okay, one £50 Amazon card and one £50 Etsy card are fine.
It’s worth considering that sometimes your business can be better off if you buy your employee a gift instead of provide gift vouchers as you will be able to reclaim VAT on it, which is something that isn’t possible as vouchers or gift cards don’t have VAT on them.
Isn’t an ongoing cost
When you provide trivial benefits, you will also have to bear in mind that the gift has to be a genuine and spontaneous one off. It isn’t possible to provide ongoing benefits like gym memberships or TV subscriptions through this tax exemption.
Isn’t a reward for work or performance
By providing a gift as a reward for work or a specific level of performance you are creating a precedent with the employee receiving it and are essentially treating the gift as an alternative to enhancing their salary or other taxable benefits.
The spirit of the trivial benefit rules is to be able to reward your team members for their loyalty and to improve employee morale, not to allow you to provide tax free remuneration.
Hasn’t been contractually agreed
Any trivial benefits provided as part of an employee’s contract will not be exempt from tax so it is vital that you don’t provide a contractual obligation in writing or even verbally to provide them.
Ultimately HMRC are eager not to allow the trivial benefit exemption to be used as a way to compensate employees as that could restrict salary growth and in turn, HMRC’s tax intake.
Can’t be part of any salary sacrifice arrangements
It isn’t possible to provide a trivial benefit as part of salary sacrifice schemes where employees exchange some of their salary as this would be considered aggressive tax avoidance and against the spirit of the rules that exempt trivial gifts.
Can limited company directors claim trivial benefits?
Company directors can, and in general the same rules as employees claiming them apply, however there are some differences and restrictions which I will point out here.
What is HMRC worried about?
Let’s imagine a scenario where you’re the owner and director of your own limited company and you are eager to minimise your corporation, VAT and dividend tax bills. In a world where there were no restrictions in place, you could just have your business gift you every personal expense that you pay for that is £50 or less.
If that happened, HMRC would lose a huge part of their tax take from small business owners. So while there are no limits to the number of gifts that can be provided to an employee, there are for directors of close companies.
What is a close company?
A close company by definition is any company which has five or fewer shareholders or where all the shareholders are also directors. Many small businesses fall into this category and as well as many limited company contractors.
Restrictions when directors of close companies receive trivial benefits
While there is no limit to the number of gifts an employee receives in a tax year, a director can’t receive trivial benefits worth more than £300 (including VAT) in a tax year. It’s important not to confuse this with the £50 limit per gift which still applies to the cost of the benefit.
For example a director is limited to 6 x £50 gifts per tax year and this will also be extended to any members of their household, unless that member is also an employee or a director themselves in which case they have their own allowance. It’s worth noting that the usual rules around aggressive tax avoidance will apply if gifting is used excessively.
Examples of Trivial Benefits
There are many trivial benefits examples that would qualify, for example a nice bottle of wine or another alcoholic beverage, but many employees don’t drink so as an alternative a non cash gift voucher or card could also work with both the bottle and voucher being exempt from taxes.
You may also want to pay for a meal out or or a few drinks for a team member and as long as the value of the outing doesn’t exceed £50 then that’s okay. In this scenario the gift is treated separately from your £150 a year annual event allowance, providing it isn’t related to work and this could also apply to other events related tickets like sending them to a concert or show.
A Great Christmas Present
One of the most common examples of when trivial benefits are used is when companies want to give their team members a Christmas present or to commemorate any other occasion. Where gifts are given to customers or suppliers, the trivial benefit rules don’t apply and these will be covered separately under an article I will produce about entertaining costs.
Your Questions Answered
Do trivial benefits apply to events?
In general events like a Christmas party and other annual parties are dealt with either under the annual event allowances or entertaining rules so we won’t cover them in this article. Team building events are usually considered staff training costs and are allowable anyway, providing there isn’t a dual purpose like a holiday.
Is a working lunch a trivial benefit?
No, technically this would be a team meeting cost providing there is no dual purpose like socialising and would then be a tax deductible expense for the business.
Are staff lunches trivial benefits?
Depending on the purpose of the lunch it would either be a team meeting and tax deductible like any other business expense, or it would be classed as a team event and the annual event allowances and rules would apply.
Do employees pay tax on trivial benefits?
There is no requirement for a employee to pay tax on a qualifying trivial benefit as they are exempt, however care must be taken not to accidently go over any limits and thresholds set.
Is there a limit to the number of trivial benefits each year?
For your average employee there is no limit, however for directors of closed companies then there is an annual limit of £300 per tax year.
How do you record trivial benefits?
Trivial benefits need to be categorised in your accounting software and would usually be allocated to general expenses, but you could use any other suitable account that makes sense to you. There is no standard requirement for the treatment of trivial benefits by HMRC.
How much tax do I pay on a benefit?
If a benefit or gift you receive from your business isn’t covered by the trivial benefits exemption, then the standard tax treatment would apply and you may have to pay income tax on it and your company would need to pay class 1A national insurance contributions.
Can sole traders receive trivial benefits?
Sadly the trivial benefit annual exempt amounts are only available to the employees and directors of limited companies.
Summary
While the rules around trivial benefits seem to be complex, the actual amounts usually involved for a business are relatively low which means that there is little risk in getting it wrong. With that in mind however, it is really important that the spirit of the rules is followed and not manipulated for uncommercial reasons.
We’re an accounting firm based in Northampton, however we support small businesses across the country. If you have any question regarding this or any of our other content, please get in touch.
