Guidance

Tax exemption for trivial benefits in kind: draft guidance

Published 11 February 2016

Employment Income Manual (EIM) 21864 - particular benefits: exemption for trivial benefits - conditions to be satisfied

Section 323A Income Tax (Earnings and Pensions) Act (ITEPA) 2003

Note: this guidance has effect for benefits provided from 6 April 2016 onwards. For guidance on HM Revenue and Customs (HMRC’s) approach to trivial benefits for tax years 2015 to 2016 and earlier see EIM21860.

Section 323A ITEPA 2003 sets out a statutory exemption for trivial benefits. Under this exemption, if an employer provides a benefit to its employees, the benefit is exempt from tax as employment income if all the following conditions are satisfied:

• the cost of providing the benefit does not exceed £50 (or the average cost per employee if a benefit is provided to a group of employees and it is impracticable to work out the exact cost per person) (see EIM21865)
• the benefit is not cash or a cash voucher (see EIM21866)
• the employee is not entitled to the benefit as part of any contractual obligation (including under salary sacrifice arrangements) (see EIM21867)
• 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) (see EIM21868)

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 (see EIM21869).

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 exemption also applies where the trivial benefit is provided on behalf of the employer by a third party. For example, where the benefit is provided through a management services company within a group of companies or by a third party business where management services have been outsourced, provided the cost of the benefit is ultimately borne by the employer.

EIM21865 - particular benefits: exemption for trivial benefits - conditions to be satisfied - the cost of the trivial benefit

Section 323A(4) ITEPA 2003

Note: this guidance has effect for benefits provided from 6 April 2016 onwards. For guidance on HMRC’s approach to trivial benefits for tax years 2015 to 2016 and earlier see EIM21860.

The guidance at EIM21864 sets out the qualifying conditions that determine whether or not a benefit provided to an employee is exempt from tax as a trivial benefit.

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.

In determining the cost of the benefit for the purposes of the exemption, as for benefits in kind more generally, use the VAT inclusive amount (see EIM15525).

The cost of providing the benefit to each employee and not the overall cost to the employer determines whether the benefit can be treated as a trivial benefit. So, a benefit costing up to £50 per employee whether provided to 1 or more employees can be treated as trivial.

Usually it will be obvious what the cost of providing the benefit is. However, on occasions an employer will provide a benefit to a group of employees and it is impracticable to establish what the precise cost is per person. In such cases, when determining whether the monetary limit has been exceeded you should take the average cost per person of providing the benefit.

In determining whether the average cost method should be applied, you should apply common sense, bearing in mind the circumstances, in deciding whether it is appropriate.

The following examples illustrate a number of scenarios:

Example A

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.

Example B

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.

Example C

Employer C provides each member of its 25 strong work-force with a bottle of wine at Christmas. The total bill comes to £1,000. This reflects 20 bottles of wine that cost £15 per bottle provided to each of its employees and 5 bottles of wine provided to each of its directors that cost £140 per bottle. In this case it is not impracticable to determine the cost of the individual benefit and the actual cost per item should be applied in determining whether the monetary limit has been exceeded for each employee and director. The benefit of the £15 bottles of wine can be covered by the exemption since the cost does not exceed the trivial benefit financial limit but not the benefit of the £140 bottles of wine provided to the directors.

EIM21866 - particular benefits: exemption for trivial benefits - conditions to be satisfied - cash and non-cash vouchers

Section 323A(3) ITEPA 2003

Note: this guidance has effect for benefits provided from 6 April 2016 onwards. For guidance on HMRC’s approach to trivial benefits for tax years 2015 to 2016 and earlier see EIM21860.

The guidance at EIM21864 sets out the qualifying conditions that determine whether or not a benefit provided to an employee is exempt from tax as a trivial benefit.

One of the conditions that has to be satisfied before the trivial benefits exemption can apply is that the benefit is not cash or a cash voucher. However, benefits provided in the form of a non-cash gift voucher can be covered by the exemption.

Example D

Employer D provides each of its employees with a bottle of wine costing £25 at Christmas. However, as an alternative, it provides employees who do not drink alcohol with a £25 gift voucher for a national supermarket chain which they can exchange for an alternative non-alcoholic Christmas gift. Both the bottle of wine and the non-cash gift voucher can be covered by the exemption.

Cash and cash vouchers should not be treated as exempt from tax as trivial benefits, regardless of how small the cost.

EIM21867 - particular benefits: exemption for trivial benefits - conditions to be satisfied - contractual obligation

Section 323A(7) and (8) ITEPA 2003

Note: this guidance has effect for benefits provided from 6 April 2016 onwards. For guidance on HMRC’s approach to trivial benefits for tax years 2015 to 16 and earlier see EIM21860.

The guidance at EIM21864 sets out the qualifying conditions that determine whether or not a benefit provided to an employee is exempt from tax as a trivial benefit.

One of the conditions that has to be satisfied before the trivial benefits exemption can apply is that the employee is not entitled to the benefit as part of a contractual obligation (including under salary sacrifice). Therefore, if the employee is entitled to the benefit, whether because of a clause in their employment contract or some other agreement, then the exemption does not apply and the benefit should be taxed in the usual way, regardless of how small the cost.

Just because a gift is provided each year, or is provided to all staff members, does not mean that the employee has a contractual entitlement to it. You should not normally seek to challenge modest gifts that are provided infrequently to employees, just because they are given to employees each year - for example, a Christmas or birthday gift.

EIM21868 - particular benefits: exemption for trivial benefits - conditions to be satisfied - not in recognition of particular services

Section 323A(9) ITEPA 2003

Note: this guidance has effect for benefits provided from 6 April 2016 onwards. For guidance on HMRC’s approach to trivial benefits for tax years 2015-16 and earlier see EIM21860.

The guidance at EIM21864 sets out the qualifying conditions that determine whether or not a benefit provided to an employee is exempt from tax as a trivial benefit.

One of the conditions that has to be satisfied before the trivial benefit exemption can apply is that 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). Therefore, if the benefit has been provided as a reward for services, or because of something they have had to do as part of their employment duties, it should be taxed in the normal way.

Typically, trivial benefits include benefits provided solely for staff welfare purposes such as a bunch of flowers on the birth of a child or a bereavement. Benefits provided in recognition of services provided such as long service awards and social events as a team-building event or as a thank-you for good results in the year will not qualify as trivial benefits. However, another exemption might apply in particular circumstances.

Example E

Employer E requires its employees to work through their lunch hour and provides them with lunch. The meal has been provided because of the work they are undertaking. The benefit does not satisfy the requirement that it is not provided in recognition of particular services performed by the employee and so the exemption does not apply.

Example F

Employer F runs a call centre and gives £25 gift vouchers to employees who hit specific performance targets each week. The gift vouchers are provided in recognition of the services provided and so the exemption cannot apply.

Example G

Employer G provides all of its staff with a Christmas gift to the value of £30 each year. The employees receive the gift each year regardless of their performance during the year. The gifts are not provided in recognition of the employees’ services and are merely a gesture of goodwill at Christmas. Subject to the other qualifying conditions being satisfied, the exemption can apply.

Example H

Employees of employer H have to work late from time to time and on those occasions their employer provides them with a taxi to take them home. The taxi is provided because they have worked late and so the exemption does not apply. However, the late night taxi exemption may apply (see EIM21831 onwards).

The vast majority of employers will only provide their employees with benefits that are not linked to particular services on an irregular or infrequent basis. There is a cost to the employer of providing such benefits and the employer will want to be careful in managing its employment costs. Therefore, if an employer provides their employees with benefits on a regular or frequent basis you should consider whether they are linked to the employee’s services.

EIM21869 - particular benefits: exemption for trivial benefits - directors and other officers of close companies

Sections 323A(1),(2) and (10) and 323B ITEPA 2003

Note: this guidance has effect for benefits provided from 6 April 2016 onwards. For guidance on HMRC’s approach to trivial benefits for tax years 2015-16 and earlier see EIM21860.

The guidance at EIM21864 sets out the qualifying conditions that determine whether or not a benefit provided to an employee is exempt from tax as a trivial benefit.

Where the employer is a close company (see CTM60060) 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 total value of benefits that can be treated as exempt trivial benefits is capped at a total cost of £300 in the tax year. This is known as the annual exempt amount. Where the company provides benefits that it considers are trivial, it will need to keep suitable records to demonstrate that this amount has not been exceeded.

This means that the total cost of separate trivial benefits provided by the company that are exempt from tax is limited to a maximum of £300 in any tax year. In determining whether a particular trivial benefit provided during the tax year is exempt, check whether the annual exempt amount has been exceeded by reference to the date on which the benefit was provided and the total cost of trivial benefits that have been provided before then.

When determining whether the cap has been exceeded for a particular tax year you should take into account the cost of benefits provided in that year, rather than the date the employer paid for the benefit. This should not normally be an issue because in most cases the benefit will be paid for in the same year as that it in which it was provided.

Where the cost of an additional trivial benefit results in a total cost that exceeds the annual exempt amount, none of the benefit that exceeds the cap is exempt. However, the tax treatment of any earlier benefits where the total cost did not exceed the annual exempt amount is not affected.

Where more than one trivial benefit is provided on the same day and the order in which they are provided determines whether the annual exempt amount is exceeded, apply the order that is most favourable to the individual.

As defined in Section 721(4) and (5) ITEPA 2003, family or household covers the employee’s:

• spouse (or civil partner)
• children and their spouses (or civil partner)
• parents
• domestic staff, dependants and guests

Broadly speaking a company is a close company if it is:

• under the control of five or fewer participators and their associates
• under the control of directors who are participators and their associates

The following examples illustrate how to apply the annual exempt amount (assume that the company is a close company and all benefits otherwise meet the trivial benefit qualifying conditions):

Example I

Company I provides a director with 3 benefits that cost £30, £40 and £50 respectively in a single tax year. The total cost of the benefits is £120. The total cost does not exceed the annual exempt amount of £300 and all of the benefits can be covered by the exemption.

Example J

Company J provides a director with 7 benefits that each cost £50 each during the tax year. The total cost is £350 which exceeds the annual exempt amount. The last benefit is not exempt from tax.

Example K

Company K provides a director with 8 benefits in the tax year. The first 5 benefits during the tax year cost £50 each. In date order, the next cost £40, £45 and £10 respectively. The total cost of the first 6 benefits is £290 which is less than the annual exempt amount so they are all exempt. The £45 benefit brings the total cost to £335 which exceeds the annual exempt amount. Therefore, the £45 benefit is not exempt, but is not counted towards the annual exempt amount. The £10 benefit brings the total cost to £300 which does not exceed the annual exempt amount so it is also exempt.

EIM21870 - particular benefits: exemption for trivial benefits - directors and other officers of close companies - members of their family or household

Section 323B(2) and (4) ITEPA 2003

Note: this guidance has effect for benefits provided from 6 April 2016 onwards. For guidance on HMRC’s approach to trivial benefits for tax years 2015 to 2016 and earlier see EIM21860.

The guidance at EIM21864 sets out the qualifying conditions that determine whether or not a benefit provided to an employee is exempt from tax as a trivial benefit.

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 total value of benefits that can be treated as exempt trivial benefits is capped at a total cost of £300 in the tax year. This is known as the annual exempt amount.

Where a trivial benefit is provided to a member of the office holder’s family or household, then the cost of the trivial benefit counts towards the office holder’s annual exempt amount, unless the member of the family or household is taxed on the benefit in their own right as an employee or office holder of the same company. Members of the office holder’s family or household who are employees of the same close company are also each subject to their own annual cap of £300.

More than one member of the same family or household may be office holders or employees of the same company. Where this is also the case and a trivial benefit is provided to a member of their family or household who is not an employee or office holder of the same company, apportion the cost of the benefit between the office holders and employees equally.

In apportioning the cost of a trivial benefit, you should also take into account any former employees who were office-holders at any time when the company was close or a member of their family or household. Allocate the cost of the trivial benefit on an equal basis between all the persons to whom the benefit should be allocated. The following examples illustrate how the cap works (assuming that the company is a close company and that all benefits otherwise meet the trivial benefit qualifying conditions):

Example L

Company L provides a director and the director’s daughter with a turkey each at Christmas. Each turkey costs £30. The daughter is not an employee or office holder of company L. The total cost of £60 counts towards the director’s annual exempt amount.

Example M

Company M provides one of its directors with a bottle of wine on her birthday. It also provides a bottle of wine to the director’s husband who is an employee of company M. Each bottle of wine cost £20. The £20 cost of each bottle counts towards the director’s and the employee’s personal annual exempt amounts.

Example N

Company N provides gift tokens costing £30 each to two of its directors, who are husband and wife, and to their son on their birthdays. The son is not an employee or office holder of company N and so the cost of his gift token is apportioned between the directors on an equal basis. £45 is allocated against each of their annual exempt amounts. This reflects the cost of the gift token they were provided with personally and half of the cost of the gift token provided to their son.

Example O

Company O gives bottles of wine each costing £30 to a director, to his wife who is a former director, and to their daughter on their birthdays. The daughter is not an employee or office holder of Company O, so the cost of her bottle of wine is apportioned between her father (a current director) and her mother (a former director). In respect of the daughter’s gift, £15 (£30/2) is allocated against the father’s annual exempt amount. The balance is allocated against the mother’s annual exempt amount under the employer-financed retirement benefits (EFRBS) regulations (The Employer-Financed Retirement Benefits (Excluded Benefits for Tax Purposes)(Amendment ) Regulations 2016).

See EIM15033 for further guidance on the EFRBS regulations as they apply to the provision of trivial benefits.

EIM21871 - particular benefits: exemption for trivial benefits - relationship with other exemptions

Section 323A ITEPA 2003

Note: this guidance has effect for benefits provided from 6 April 2016 onwards. For guidance on HMRC’s approach to trivial benefits for tax years 2015 to 2016 and earlier see EIM21860.

Where a benefit is covered both by the trivial benefits exemption and also by another exemption, in applying the trivial benefits exemption, you should apply the outcome that is most favourable to the employee.

Example P

Employer P provides its employees with two annual functions at Christmas and in the summer. The first function costs the employer £140 per head and the second costs £40. The first function is covered by the annual parties and functions exemption under section 264 ITEPA. The second function is not covered by that exemption because the financial limit of £150 has been exceeded by the combined total of the two events. However, the second function can be covered by the trivial benefits exemption because the cost did not exceed £50.

If an existing exemption exempts only part of a benefit, even if the excess cost is less than the trivial benefit monetary limit, that excess is not exempt.

Example Q

Employer Q provides its employees with an annual function at Christmas that costs it £180. The benefit is not exempt under the annual parties and functions exemption under section 264 ITEPA because the cost of £180 exceeds the financial limit for the exemption of £150. Nor is the benefit covered by the trivial benefits exemption because the cost of £180 exceeds the trivial benefit financial limit of £50.

Example R

Employer R provides its employees with access in the workplace to tea, coffee or water from a cooling dispenser. If this refreshment is available generally to all employees, the benefit is exempt from charge under the subsidised meals exemption at section 317 ITEPA (EIM21670). If the exemption does not apply, you should accept that these refreshments represent a trivial benefit. However, see example E in EIM21868 where a working lunch is provided.

EIM21871 - particular benefits: exemption for trivial benefits - miscellaneous issues

PAYE Settlement Agreement (PSA)

For practical purposes it may be that small cash and cash voucher benefits can be included in a PSA. Consider whether the benefit is suitable for a PSA, using the flowchart at Annex 3 in the PSA Manual, and bearing in mind the examples suitable for a PSA, as set out in Statement of Practice 5/96.

Remember that a PSA is a voluntary arrangement on the part of the employer and can include items that are minor, irregular or impractical to apply PAYE to, or apportion the value of a particular benefit. However if you are satisfied that a particular benefit is exempt as a trivial benefit there is no need to include it within a PSA or P11D.

Minor benefits

Trivial benefits should not be confused with “minor” benefits, which may be exempt from charge under the powers in Section 210 ITEPA. For example, the provision to employees of welfare counselling advice (EIM21845) or the provision of special equipment to employees with a disability (EIM21846).

EIM15021 - employer-financed retirement benefits schemes: definition of ‘relevant benefits’ and ‘excluded benefits’

Section 393B ITEPA 2003

Relevant benefits

‘Relevant benefits’ are defined as meaning any lump sum, gratuity or other benefit provided:

• on retirement (see EIM15042) or death (see example at EIM15310)
• in anticipation of retirement (see EIM15149)
• after retirement or death in connection with past service (see EIM15149)
• on or in anticipation of, or in connection with, any change in the nature of the employee’s service (see EIM15149)
• by virtue of a pension sharing order or provision

This includes a non-cash benefit. There is an example of this point at EIM15205.

However, it does not include any of the following:

• pension income charged to tax under Part 9 ITEPA 2003 (see EIM74000)
• benefits chargeable under Schedule 34 FA 2004 (see PTM113000)
• ‘excluded benefits’

Excluded benefits

The following are ‘excluded benefits’:

• benefits in respect of ill-health or disablement of an employee during service
• benefits in respect of death by accident of an employee during service (see example at EIM15315)
• benefits under a ‘relevant life policy’. Guidance on the meaning of this is available in the Insurance Policyholder Taxation Manual (IPTM)
• benefits excluded by regulation (see below)

Excluding regulations

The regulations providing for benefits to be excluded benefits are:

• The Armed Forces and Reserve Forces (Compensation Schemes) (Excluded Benefits for Tax Purposes) Regulations 2006 (SI 2006/132) exclude all benefits paid from the Armed Forces Compensation Scheme from 6 April 2006 onwards
• The Employer-Financed Retirement Benefits (Excluded Benefits for Tax Purposes) Regulations 2006 (SI 2006/210) exclude lump sum death benefits paid on the non-accidental death of an employee during service where those benefits are provided under scheme rules which were in place before 6 April 2006
• The Employer-Financed Retirement Benefits (Excluded Benefits for Tax Purposes) Regulations 2007 (SI 2007/3537) exclude a number of benefits which were not chargeable to tax when provided by the employer where provision continues after the employment has ceased. The exclusion has retrospective effect from 6 April 2006 and applies to the following benefits:
  • living accommodation and related benefits (see EIM15022 regarding accommodation, EIM15023 regarding accommodation-related benefits, and EIM15024 for benefits provided to an employee’s family)
  • non-cash benefits received before 6 April 1998 (see EIM15025)
  • welfare counselling (see EIM15026)
  • recreational benefits (see EIM15027)
  • annual parties and similar functions (see EIM15028)
  • writing of wills etc. (see EIM15029)
  • equipment for disabled employees (see EIM15030)
• The Employer-Financed Retirement Benefits (Excluded Benefits for Tax Purposes) (Amendment) Regulations 2009 (SI 2009/2886) amend the regulations at point (3) above to provide a further exclusion from 6 April 2006 covering the provision of annual health-screening and medical check-ups provided by an employer to former employees. This exemption applies if:
  • the former employee would have been exempt from tax under section 320B ITEPA had those benefits been provided in the course of their employment, and
  • the former employee was provided with one or the other of those benefits at least once during the period of their employment
• The Employer-Financed Retirement Benefits (Excluded Benefits for Tax Purposes) (Amendment) Regulations 2011 (SI 2011/2281) further amend the regulations at point (3) above to provide some exclusions concerning benefits paid specifically to or in respect of armed forces personnel (see EIM15031). These exclusions are retrospective to cover the actual times when payments arising from the commitments in the 2008 Service Command Paper and later Armed Forces Covenant began to be made.
• The Employer-Financed Retirement Benefits (Excluded Benefits for Tax Purposes) (Amendment) Regulations 2016 (SI 2016/XXX) also further amend the regulations at point (3) above to exclude the provision of trivial benefits to or in respect of a former employee (see EIM15033). This exclusion applies to trivial benefits provided from 6 April 2016 onwards.

EIM15033 - employer-financed retirement benefits schemes: excluded benefits: trivial benefits

Sections 323A and 323B ITEPA 2003

Employer-Financed Retirement Benefits (Excluded Benefits for Tax Purposes) Regulations 2007 (SI 2007/3537), as amended by The Employer-Financed Retirement Benefits (Excluded Benefits for Tax Purposes) (Amendment) Regulations 2016 (SI 2016/xxx)

Note: this guidance has effect for benefits provided from 6 April 2016 onwards.

The provision of a trivial benefit to, or in respect of, a former employee is an excluded benefit if there would have been no income tax charge by virtue of sections 323A and 323B ITEPA 2003 had it been provided to, or in respect of, a current employee.

Guidance on the qualifying conditions for a benefit to be classed as a trivial benefit is available at EIM21864.

As explained in the guidance linked to above, 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 total value of benefits that can be treated as exempt trivial benefits is capped at a total cost of £300 in the tax year. The £300 limit is known as the annual exempt amount. There is guidance on how this limit is applied at EIM21869 and EIM21870.

This ‘close company restriction’ similarly applies to benefits provided from EFRBS where the former employer is a close company at the time the benefit is provided and the recipient of the benefit is either:

• a person who was a director or other office-holder of the former employer at any time when the former employer was a close company
• a member of the family or household of such a person

Where the trivial benefit is provided to a member of the family or household of a former director/office-holder of a close company, the cost of the benefit is included in the calculation of the amount allocated against the former director/office-holder’s annual exempt amount. There is an example of how this works at EIM21870.