“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.”

Trivial benefit traps – Contractual obligations

The trivial benefits exemption allows employers to provide employees with low cost benefits free of tax and National Insurance and any reporting obligations. For the purposes of the exemption, a benefit is trivial if the cost per head is not more than £50. Where trivial benefits are provided to an officer of a close company or a member of their family or household, an annual cap of £300 per tax year also applies.

For the exemption to be available, the benefit must not be provided in return for services provided and the employee must not be contractually entitled to receive the benefit.

Contractual entitlement

Contractual entitlement is wider than simply inclusion in the contract of employment. Consequently, the fact that the contract makes no reference to the provision of trivial benefits is not enough to satisfy the conditions for the exemption.

In the December 2019 issue of their Employer Bulletin, HMRC highlighted a number of ways in which a contractual obligation may arise, including:

  • a letter to the main contract document
  • a staff handbook
  • a redundancy agreement
  • an employer union agreement

If any of these provide for the employee to receive the trivial benefit, the exemption will not apply.

Beware of creating a ‘legitimate obligation’

Employers seeking to make use of the trivial benefits exemption should also be wary of falling into the ‘legitimate expectation’ trap; a contractual obligation may also arise is the employee has a legitimate expectation to receive the benefit.

In the December 2019 issue of Employer Bulletin, HMRC illustrate this with an example of an employer who provides employees with a cream cake each Friday. While there is no contractual obligation for the employer to provide the employees with a cream cake on a Friday, the fact that the employer does so every Friday creates a legitimate expectation, taking the provision of the cakes outside the trivial benefits exemption.

Frequency seems to be a problem here – HMRC seemingly do not apply the legitimate expectation argument where a benefit is provided annually, even if it is provided each year. HMRC’s Employment Income Manual at EIM21867, states:

“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.”

The guidance instructs HMRC officers that they “should not normally 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”.

Good practice

To avoid falling into the legitimate expectation trap, vary both the nature and timing of trivial benefits provided to employees.

Partner note: ITEPA 2003, s. 323A.

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As business owners we all want to make sure our company is a great place to work. Have you considered giving your employees or even their family members educational scholarships?

Partnership rather than a limited company. We explain why in today’s blog.

Employer-funded scholarships

Special tax rules apply to scholarships, which include exhibitions, bursaries or other similar education endowments.

Provided certain conditions are met, there will be no tax or reporting implications where an employer funds a ‘fortuitous’ scholarship for an employee’s family member. Broadly, this means that there must be no direct connection between the employee working for the employer and their family member getting the scholarship.

A scholarship is ‘fortuitous’ if all the following apply:

  • the person with the scholarship is in full-time education
  • the scholarship would still have gone to that person even if their family member did not work for the employer
  • the scholarship is run from a trust fund or under a scheme
  • 25% or fewer of the payments made by the fund or scheme are for employment-linked scholarships

If the scholarship does not qualify for exemption, the employer must report it to HMRC on form P11D and pay Class 1A NICs on the cost of providing it.

Unfortunately, in a family company, directors’ children are unable to take advantage of this provision because the tax legislation deems there to be a benefit in kind. However, in some circumstances a remoter relative (for example a grandparent) could establish such a scheme provided that the student was validly employed and their parents are not involved with the company.

Sandwich courses

An employee in full-time employment may leave that employment for a period to attend an educational establishment but continue to receive payments from their employer, for example where the employee is on a ‘sandwich’ course. Such payments will be treated as exempt from income tax, provided the following conditions are satisfied:

  1. The employer must require the employee to be enrolled at the educational establishment for at least one academic year and to attend the course for at least 20 weeks in that academic year. If the course is longer, the employee must attend for at least 20 weeks on average, in an academic year over the period of the course.
  2. The establishment must be a recognised university, technical college or ‘similar educational establishment’, open to the public and offering more than one course of practical or academic instruction.
  3. The payments must not exceed a specified maximum figure for the academic year. This figure must include lodging, subsistence and travel allowances but does not include any tuition fees payable to the establishment by the employee. Note that:
  • the exemption can apply to payments of earnings payable to the student for periods spent studying at the educational establishment
  • it cannot, however, cover payments made for any periods spent working for the employer, whether during vacations or otherwise
  • the current maximum figure is £15,480 per academic year
  • in principle, the limit is all or nothing: if it is breached then the whole amount is taxable. However, if an increased payment is made during the academic year then this does not invalidate earlier payments made within the agreed limit

Qualifying payments will also be exempt for Class 1 National Insurance Contributions purposes.

Example

Jack’s employer pays for him to attend college on a course that starts in September 2018 and finishes at the end of the academic year in June 2019. Jack works for his employer over the Christmas and Easter periods, during which he is paid his normal monthly salary. His income while working during holidays will be subject to tax and Class 1 NICs, because the exemption only applies to income when attending college.

Jack’s employer pays him £3,000 in September 2018 for the first term of the academic year followed by two further payments of £3,000 each in January 2 and April 2019 to cover terms 2 and 3. These three amounts of £3,000 each will be exempt from tax and NICs because they meet the qualifying conditions, including being less than the financial ceiling of £15,480.

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With holiday season in full swing, we explain the strict scenarios where you can deduct for business entertaining and gifts in calculating taxable profits.

Can we deduct entertaining expenses?

The tax rules on the deductibility of entertaining expenses are harsh and often misunderstood – the fact that the expenditure is incurred for businesses purposes does not make it deductible. Subject to certain limited exceptions, no deduction is allowed for business entertaining and gifts in calculating taxable profits.

What counts as business entertainment?

Business entertainment is the provision of free or subsidised hospitality or entertainment. Hospitality includes the provision of food drink or similar benefits for which no payment is made by the recipient. It also extends to subsidised hospitality whereby the charge made to the recipient does not cover the costs of providing the entertainment or hospitality.

Examples of business entertaining would include taking a supplier to lunch, taking customers to a day at the races, or inviting them to a box at rugby match, and suchlike. The definition is wide.

Exception 1: Entertaining employees

One of the main exceptions to the general rule that entertaining expenses cannot be deducted is in relation to staff entertainment. A deduction is allowed for the cost of entertaining staff, as long as the costs are incurred wholly and exclusively for the purposes of the trade and the entertaining of the staff is not merely incidental to the entertaining of customers. So, for example, a company would be able to deduct the cost of the staff Christmas party in calculating its taxable profits. However, if a company takes customers to Wimbledon, the fact that a number of employees also attended is not enough to guarantee a deduction as the entertaining provided for the employees is incidental to that for customers.

It should be noted that unless an exemption is in point, employees may suffer a benefit in kind tax charge on any entertainment provided.

Exception 2: Normal course of trade

The disallowance does not apply where the business is that of providing hospitality, and as such a deduction is allowed for the costs incurred in providing that hospitality as long as they are incurred wholly and exclusively for the purposes of the business. Businesses such as restaurants and events management companies would fall into this category.

Exception 3: Contractual obligation to provide entertainment

Where entertainment is provided under a contractual obligation, this is not treated as business entertainment and a deduction is allowed for the cost. A common example would be where hospitality is provided as part of a package. However, the business should be able to demonstrate that they have received a full return for the entertainment provided.

Exception 4: Small gifts carrying an advert

The provision of business gifts is treated as business entertaining with the result that a deduction for the costs is not generally allowed. However, there is an exception for gifts costing not more than £50 per year per recipient which bear a conspicuous advert for the business. An example of a deductible gift would be a diary or a water bottle featuring an advert for the business.

Remember…

Just because entertaining is incurred for business purposes does not mean that it is allowable – business entertaining needs to be added back in the corporation tax computation.

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There are five conditions that need to be met to get the tax benefits of a pool car.

When is a car a pool car?

Rather than allocating specific cars to particular employees, some employers find it preferable to operate a carpool and have a number of cars available for use by employees when they need to undertake a business journey. From a tax perspective, provided that certain conditions are met, no benefit in kind tax charge will arise where an employee makes use of a pool car.

The conditions

There are five conditions that must be met for a car to be treated as a pool car for tax purposes.

  1. The car is made available to, and actually is used by, more than one employee.
  2. In each case, it is made available by reason of the employee’s employment.
  3. The car is not ordinarily used by one employee to the exclusion of the others.
  4. In each case, any private use by the employee is merely incidental to the employee’s business use of the car.
  5. The car is not normally kept overnight on or in the vicinity of any of the residential premises where any of the employees was residing (subject to an exception if kept overnight on premises occupied by the person making the cars available).

The tax exemption only applies if all five conditions are met.

When private use is ‘merely incidental’

To meet the definition of a pool car, the car should only be available for genuine business use. However, in deciding whether this test is met, private use is disregarded as long as that private use is ‘merely incidental’ to the employee’s business use of the car.

HMRC regard the test as being a qualitative rather than a quantitative test. It does not refer to the actual private mileage, rather the private element in the context of the journey as a whole. For example, if an employee is required to make a long business journey and takes the car home the previous evening in order to get an early start, the private use comprising the journey from work to home the previous evening would be regarded as ‘merely incidental’. The car is taken home to facilitate the business journey the following day.

Kept overnight at employee’s homes – the 60% test

For a car to meet the definition of a pool car, it must not normally be kept overnight at employees’ homes. In deciding whether this test is met, HMRC apply a rule of thumb – as long as the total number of nights on which a car is taken home by employees, for whatever reason, is less than 60% of the total number of nights in the period, HMRC accept that the condition is met.

When a benefit in kind tax charge arises

If the car does not meet the definition of a pool car and is made available for the employee’s private use, a tax charge will arise under the company car tax rules.

Partner note: ITEPA 2003, s. 167.

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Who the phone contract is billed to makes a big difference in tax.

Tax-free mobile phone

Mobile phones are ubiquitous – they are also subject to a tax exemption which enables employees to enjoy a mobile phone provided by their employer without suffering a benefit in kind tax charge. However, as with all exemptions there are conditions to be met for the exemption to apply.

Nature of the exemption

The exemption applies where an employer provides an employee with a mobile phone for his or her use. However, ownership of the phone must not be transferred to the employee. The exemption covers the use of the phone and the cost of all calls, including private calls. It also applies to the provision of a SIM card for use in the employee’s own phone.

The exemption is limited to one phone or SIM card per employee. Phones or SIM cards provided to members of the employee’s family or household by virtue of the employee’s employment are treated as if they were provided to the employee.

If the employee is provided with more than one mobile phone or SIM card, second and subsequent phones or SIM cards are taxed as a benefit in kind (as an asset made available for the employee’s use).

If the exemption does not apply, the employer can meet the cost of business calls without triggering a tax charge.

Contract between employer and supplier

While the end result may seem to be the same if the employer contracts with the phone supplier or if the employee takes out the contract and the employer either pays the bill or reimburses the employee, from a tax perspective the outcome is very different.

The mobile phone exemption only applies if the contract is between the employer and the phone supplier. If the contract is between the employee and the phone supplier and the employer meets the cost, the employer is meeting a personal bill of the employee rather than providing the employee with a mobile phone. This is an important distinction and can mean the difference between the exemption being available and the employee suffering a tax hit.

Smartphones count

The exemption applies to smartphones. To count as a phone, the device must be capable of making and receiving voice calls. Tablets, such as iPads, do not qualify (even if calls can be made via What’s App or similar services). The fact that a device has telephone functionality does not in itself qualify it as a mobile phone. As a general rules, devices that use Voice Over Internet Protocol (VOIP) systems will not qualify.

Beware the OpRA rules

The exemption is lost if the mobile phone is made available to the employee under a salary sacrifice or other optional remuneration arrangement (OpRA). Where this is the case, the alternative valuation rules apply and the benefit is valued by reference to the salary foregone instead.

 Partner note: ITEPA 2003, s. 319.

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Government Incentives

Do you think electric cars are worth the tax-free benefits?

Electricity for electric cars – a tax-free benefit

The Government is keen to encourage drivers to make environmentally friendly choices when it comes to choosing a car. As far as the company car tax market is concerned, tax policy is used to drive behaviour, rewarding drivers choosing lower emission cars with a lower tax charge, while penalising those whose choices are less green.

The use of the tax system to nudge drivers towards embracing electric cars also applies in relation to the taxation of ‘fuel’. As a result, tax-free benefits on are offer to those drivers who choose to ‘go electric’.

Company car drivers

Electricity is not a ‘fuel’ for the purposes of the fuel benefit charge. This means that where an employee has an electric company car, the employer can meet the cost of all the electricity used in the car, including that for private journeys, without triggering a fuel benefit charge. This can offer significant savings when compared with the tax bill that would arise if the employer pays for the private fuel for a petrol or diesel car. However, it should be noted that a fuel charge may apply in relation to hybrid models.

Example

Maisy has an electric company car with a list price of £20,000. Her employer meets the cost of all electricity used in the car, including that for private motoring. As electricity is not a fuel for these purposes, there is no fuel benefit charge, and Maisy is enabled to enjoy her private motoring tax-free.

By way of comparison, the taxable benefit that would arise if the employer meets the cost of private motoring in a petrol or diesel company car with an appropriate percentage of 22% would be £5,302 (£24,100 @ 22%) for 2019/20. The associated tax bill would be £1,060.40 for a basic rate taxpayer and £2,120.80 for a higher rate taxpayer.

However, the rules do not mean that an employee loses out if they have an electric company car and initially meets the cost of electricity for business journeys and reclaim it from their employer. There is now an advisory fuel rate for electricity which allows employers to reimburse employees meeting the cost of electricity for business journeys at a rate of 4p per mile without triggering a tax bill. However, amounts in excess of 4p per mile will be chargeable.

Employees using their own cars

Currently, there is no separate rate for electric cars under the approved mileage payments scheme. This means that the usual rates apply where an employee uses his or her own electric car for business. Consequently, the employer can pay up to 45p per mile for the first 10,000 business miles in the year and 25p per mile for subsequent business miles tax-free. If the employer pays less than this, the employee can claim a deduction for the shortfall. Payments in excess of the approved amounts are taxable.

Employees with their own electric cars can also enjoy the benefit of tax-free electricity for private motoring – but only if they charge their car using a charging point provided by their employer at or near their place of work. The exemption also applies to cars in which the employee is a passenger, so would apply, for example, if an employee’s spouse drove the employee to work, charging their car when dropping the employee off or picking the employee up.

Partner note: ITEPA 2003, ss. 149, 237A; www.gov.uk/government/publications/advisory-fuel-rates/advisory-fuel-rates-from-1-march-2016

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Tax aspects of using a work’s van

If an employee is able to use a work’s van for private use, which generally includes home-to-work travel, there will be a taxable benefit and a subsequent tax charge.

From 6 April 2019, the flat-rate van benefit charge has risen from £3,350 to £3,430, representing a small increase in real terms to a basic rate taxpayer of £16 a year.

If an employer also provides the employee with fuel for private use, then a tax charge on the provision of fuel will also arise based on an annual fixed rate. For 2019/20 the flat-rate van fuel benefit charge has been increased from £633 to £655, so there is an increase in real terms to a basic rate taxpayer of just £4.40.

What is a van?

To qualify as a van, a vehicle must be:

  • a mechanically propelled road vehicle; and
  • of a construction primarily suited for the conveyance of goods or burden of any description; and
  • of a ‘design weight’ which does not exceed 3,500kg; but
  • not a motorcycle as defined in the Road Traffic Act 1988, s. 185(1). Broadly, this means that it must have at least four wheels.

The design weight of a vehicle, also known as the ‘manufacturer’s plated weight’, is normally shown on a plate attached to the vehicle. What it means is the maximum weight which the vehicle is designed or adapted not to exceed when in normal use and travelling on the road laden.

Human beings are not ‘goods or burden of any description’ so a vehicle designed to carry people (such as a minibus) will not be a van for these purposes.

Private use

A charge to income tax will generally arise if a company van is made available, by reason of the employment, to an employee or to a member of his or her family or household for private non-business-related use. It must be made available without a transfer of ownership from the employer to the employee.

There are three types of journeys that are classed as non-taxable business use:

  • business journeys – journeys the employee makes in the course of carrying out the duties of their employment
  • ordinary commuting – travel to and from home to a place of work
  • insignificant private use beyond ordinary commuting – for example making a slight detour to purchase a sandwich for lunch

Pool vans

Broadly, vans used as pool vans that meet the following criteria will not attract a benefit-in-kind tax charge:

  • the van is used by more than one employee
  • the van is not ordinarily used by one employee to the exclusion of others
  • the van is not normally kept at or near employees’ homes
  • it is used only for business journeys (A limited amount of incidental private use is allowed. For example, commuting home with the van to allow an early start to a business journey the next morning)

Given that these rules provide a total exemption from any tax charge, it is not surprising that HMRC apply them very strictly.

Tax charge

The benefit charge applies regardless of the employee’s earnings rate but may be proportionately reduced if the van is only available for part of a tax year, and/or by any payments made by the employee for private use.

For 2019/20, a basic rate taxpayer will pay £686 for the use of a work’s van (£3,430 x 20%). For a higher rate taxpayer, the cost will be £1,372.

If fuel is also provided for private use, for 2019/20, a basic rate taxpayer will additional tax of £131 (£655 x 20%), and a higher rate taxpayer will pay £262.

Tax is normally collected through the employee’s Pay As You Earn (PAYE) tax code.

Partner Note: ITEPA 203, ss 154-159; FA 2016, s 11; EIM22701ff

Reporting expenses and benefits for 2018/19

Where employees were provided with taxable benefits and expenses in 2018/19, these must be notified to HMRC.

The reporting requirements depend on whether the benefits were payrolled or not.

Benefits not payrolled

Taxable benefits that were not payrolled in 2018/19 must be reported to HMRC on form P11D. There is no need to include benefits covered by an exemption (although take care where provision is made via an optional remuneration arrangement (OpRA)) or those included within a PAYE Settlement Agreement. Paid and reimbursed expenses can be ignored to the extent that they would be deductible if the employee met cost, as these fall within the statutory exemption for paid and reimbursed expenses.

The value that must be reported on the P11D depends on whether the benefit is provided via an OpRA, such as a salary sacrifice scheme. Where the benefit is provided other than via an OpRA, the taxable amount is the cash equivalent value. Where specific rules apply to determine the cash equivalent value for a particular benefit, such as those applying to company cars, employment-related loans, living accommodation, etc., those rules should be used. Where there is no specific rule, the general rule – cost to the employer less any amount made good by the employee – applies.

Where provision is made via an OpRA, and the benefit is not one to which the alternative valuation rules do not apply, namely:

  • payments into pension schemes
  • employer provided pension advice
  • childcare vouchers, workplace nurseries and directly contracted employer-provided childcare
  • bicycles and cycling safety equipment, including cycle to work schemes
  • low emission cars (Co2 emissions 75g/km or less)

the taxable amount is the relevant amount. This is the higher of the cash equivalent under the usual rules and the salary foregone or cash alternative offered. The taxable amount is the cash equivalent value where the benefit falls outside the alternative valuation rules.

Payrolled benefits

Payrolled benefits should not be included on the P11D but must be taken into account in calculating the Class 1A National Insurance liability on form P11D(b).

P11D(b)

Form P11D(b) must be filed regardless of whether benefits are payrolled or notified to HMRC on form P11D. The P11D(b) is the Class 1A return, as well as the employer’s declaration that all required P11Ds have been submitted.

Paper or online

There are various ways in which forms P11D and P11D(b) can be filed. The simplest is to use HMRC’s online end of year expenses and benefits service or HMRC’s PAYE Online for employers service. Forms can also be filed using commercial software packages.

There is no requirement to file P11Ds and P11D(b)s online – paper forms can be filed if preferred.

Deadline

Regardless of the submission methods, forms P11D and P11D(b) for 2018/19 must reach HMRC by 6 July 2019. Employees must be given a copy of their P11D (or details of the information contained therein) by the same date. Details of payrolled benefits must be notified to employees by the earlier date of 31 May 2019.

Class 1A National Insurance must be paid by 22 July where paid electronically, or by 19 July where payment is made by cheque.

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Employee Benefits, Tax free

More than 25 million working days are lost annually due to work-related ill health matters, including the two leading causes of workplace absence, namely back injuries and stress, depression or anxiety. There are however, several areas where employers can use tax breaks and exemptions to help promote health and fitness at work.

Gym facilities and memberships

In-house gym facilities may be offered to employees at a convenient location to fit in around work and there will be no tax or NIC liability arising if the following conditions are satisfied:

  • the facilities must be available for use by all employees, but not to the general public;
  • they must be used mainly by employees, former employees or members of employees’ families and households (employees of any companies grouped together with to provide the facilities also count);
  • the facilities must not be located in a private home, holiday or other overnight accommodation (including any associated sporting facilities); and
  • they must not involve use of a mechanically propelled vehicle (including road vehicles, boats and aircraft).

For employers who cannot practically provide in-house gym facilities, it may be possible to negotiate favourable membership rates with a local gym or leisure centre. Whilst this may lead to a tax liability for employees, the preferential rate can often be up to 20% – 30% cheaper than the normal price, so this is still an attractive offer for employees.  Depending on how the cost of the gym membership is funded, the fees will either be taxed as earnings or as a taxable benefit-in-kind. So, for example, if an employer gives the employee additional salary to pay for their gym membership, the money is taxed as earnings through PAYE. If the employer pays the gym membership direct, a taxable benefit-in-kind arises on the employee and should be reported to HMRC on form P11D, or through the payroll.

Where an employer pays for a gym membership and the employee contributes towards the cost from their net pay (after tax and NICs), this is referred to as ‘making good’. The amount of the benefit (cost of gym membership) is reduced by the amount of the contribution.

Health-screening, check-ups and recommended treatments

A tax and NIC-free exemption allows employers to fund one health-screening assessment and/or one medical check-up per year per employee.

Subject to an annual cap of £500 per employee, employer expenditure on medical treatments recommended by employer-arranged occupational health services may be exempt for tax and NICs. ‘Medical treatment’ means all procedures for diagnosing or treating any physical or mental illness, infirmity or defect. Broadly, in order for the exemption to apply, the employee must have either:

  • been assessed by a health care professional as unfit for work (or will be unfit for work) because of injury or ill health for at least 28 consecutive days;
  • been absent from work because of injury or ill health for at least 28 consecutive days.

Employer-funded eye, eyesight test, and ‘special corrective appliances’ (i.e. glasses or contact lenses) may also be exempt for ta and NICs, providing certain conditions are satisfied.

Many employees struggle to fit physical activity into their busy working days but research shows that being active for just one hour can offset the potential harm of being inactive. As fitness and health issues become increasingly popular, anything an employer can do to help is likely to be most welcomed by employees.

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