How to Stay Safe from HMRC
1 April 15 | By: Jas Jhooty
One of the major recommendations in the Office of Tax Simplification (OTS) report into simplifying benefits and expenses was to introduce a statutory limit relating to the provision of trivial benefits to employees by employers. This limit was set at £50 per gift subject to a maximum of £300 in any given tax year. It came as a great surprise then as to why there was an eleventh hour decision to completely remove all references to this exemption from Finance Act 2015. This article seeks to understand and explain why this last minute decision may have been made.
HMRC instructions are that an employer can make a request to treat a benefit as exempt from tax, on the grounds that the cash equivalent of the benefit taxable on the employee (or on each of the employees concerned if there is more than one of them) is so trivial as to be not worth pursuing. This is sometimes referred to as ‘de minimis’ grounds.
Unfortunately there is no general statutory limit below which benefits are not taxable. This has led to protracted negotiations with local HMRC inspectors as to what amount can be considered as being trivial. Traditionally larger employers who used the services of professional advisors (such as emTax) usually managed to negotiate a higher figure for their trivial benefits limit than smaller unrepresented employers.
This was seen as being inequitable and the OTS sought to level the playing field by introducing a strict set of circumstances when trivial benefits could be provided to employees tax free, along with suggested limits for individual gifts and an overriding annual limit per employee.
Consultation & draft legislation
A consultation into this proposal commenced over summer 2014 the results of which were announced in the 2014 pre-budget report. This was followed by the publication of the draft 2015 Finance Bill in December 2014 which contained reference to a £50 trivial benefit exemption.
Most surprisingly of all the trivial benefits exemption was even trumpeted in George Osbourne’s last budget as an example of how the Government are seeking to introduce measures to alleviate employers’ burdens by simplifying benefits and expenses legislation.
References were again made in the final 2015 Finance Bill that was to be put through the parliamentary procedure before receiving Royal Assent and thus becoming law. Interestingly it was at this final stage that an annual cap of £300 per employee in relation to trivial benefits was mentioned for the first time.
Possible reasons for the withdrawal of the exemption
It is our opinion that it is this last minute inclusion of a £300 annual cap that has forced politicians to kick this eminently sensible proposal into the long grass.
In the summer, relevant stakeholders (including emTax) were consulted about this and the other OTS proposals to simplify benefits and expenses. Mention was made back then about an annual cap. We felt that for the new terms to be satisfied, the only time that the £50 trivial benefit could be utilised was at irregular life events that had no connection with an employee’s duties of employment. I.e. it could only be used to provide exemption for a small gift made on special occasions in an employee’s life e.g. births, deaths & marriages etc. There was no reason for an annual cap as any given employee would be lucky/unlucky to experience two/three such events in any one year. Any item provided outside of these terms would have to be taxed as normal.
When the annual cap of £300 was announced at the very last minute, probably introduced by some over-zealous civil servant as a means of controlling this exemption, they displayed very little knowledge about what actually happens in the real world. Any self-respecting politician who saw this annual cap mentioned in the proposed legislation that was about to become law, would be understandably panicked. They probably envisaged a £3 billion hit to the Exchequer in the highly unlikely scenario that every employee in the country was going to receive a £50 gift from their employer, six times a year! In our opinion this knee-jerk reaction is the most probable reason why all references to the trivial benefit exemption have been removed from Finance Act 2015
The position now
The previous regime of negotiating trivial benefits limits with your local HMRC inspector remains. In some ways the existing regime is preferable to the new regime as it is possible to argue that the provision of a small gift across the whole work force can be considered to be have ‘de-minimis’ tax consequences given the right circumstances.
How emTax can help
Our consultants have many years of experience of negotiating with HMRC in setting trivial benefits exemption levels. It was our suggestion during the consultation process that the then proposed trivial benefit cap of £30 should be raised to £50 as this remains the agreed figure we routinely reach for our clients. In certain situations we have successfully negotiated even higher trivial benefits limits dependent on the industry sector and the profile of the workforce.
We can assist employers in making reference to the types of trivial benefits they provide in their dispensation application letter to safeguard them at the time of their employer compliance reviews.
We would like to take this opportunity to wish all of our subscribers a very Happy Easter and hopefully a well-deserved break from work. We will be back next week with a very important announcement about an exciting new partnership we have recently entered into.