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Why the Long Service Award tax exemption is unfair

2 November 17 | By: Jas Jhooty

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Employee recognition by an employer can be an important motivational tool, as well as having a positive effect on an employee’s desire to remain with the company or organisation. Most employer awards made to an employee are liable to be treated as taxable earnings or as a benefit because they are given as a ‘reward’ by reason of the employment. However, subject to certain conditions being satisfied, a specific tax exemption exists for long service awards.

What are the conditions for tax exempt awards?

Long service awards made to employees as a testimonial to mark long service are not taxable provided the following conditions are satisfied:

  • the employee must have had a period of service of at least 20 years with the employer making the award
  • there must have been no similar award made to the recipient by the same employer in the last 10 years ending with the date on which the later award is made, irrespective of whether the earlier award was charged to tax (all earlier awards in respect of length of service with the same employer count for the purpose of this 10-year test)
  • the award must not have cost the provider more than the ‘permitted maximum’, which is £50 per year of the employee’s service in respect of which the award was made
  • the award must broadly be something other than money

Taxable long service awards

Long service awards are treated as earnings where:

  • the employee buys the award and is reimbursed by the employer afterwards
  • the employee receives a cash amount with instructions to purchase a tangible gift
  • the employer pays the supplier for a memento that the employee has already purchased
  • the employee receives an award for less than 20 years of service
  • the employee has received a similar award for service within the last 10 years, eg some employers make long service awards at 1, 5, 10, 15, 20, 25, etc years
    All the above awards are taxable.

Example

Brenda receives the following long service awards from her employer:

  • after 20 years service, furniture costing £1,000
  • after 30 years service, jewellery costing £750
  • after 35 years service, electrical goods costing £850
  • after 40 years service, a gold watch costing £1,000

The effect of the long service awards exemption is as follows:

The 20 year award is the first award received. The cost does not exceed £50 for each year of service (20 × £50 = £1,000) so there is no tax charge. If the furniture had cost £1,500, tax would have been charged on £500, the excess over £1,000 (’the permitted maximum’).

The 30 year award of £750 satisfies the conditions for tax exemption, not having been made within ten years of the first award and not exceeding the £50 per year of service (30 × £50 = £1,500). The monetary limit is calculated separately on each occasion, where an employee receives awards on two or more occasions during service with the same employer. The exempt amount available at the 30 year point is not affected by the exemption allowed in respect of the 20 year award.

The 35 year award of £850 is taxed in full as although it falls within the financial limit (35 × £50 = £1,750), Sally has received a similar award within the previous ten years.

The 40 year award of £1,000 is taxed in full, as although it falls within the financial limit (40 × £50 = £2,000), Sally has received a similar award within the previous ten years. The 35 year award is counted even though it was taxed in full.

Unfair tax treatment

Many perceive the ‘10-year interval’ rule as a source of unfairness; an award after 15 years (not qualifying for the exemption) would disqualify an otherwise-qualifying award after 20 years. Also many employers would like to be able to make an award in the form of vouchers. There was talk a few years ago of modernising this archaic legislation to bring it up to date but to date nothing has been tabled.

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