// Get ready for April 2020

Free IR35 Software Demonstration

0345 548 3680


Home / Blog


What is the P11D cost of in-house benefits provided to staff?

11 June 13 | By: Jas Jhooty

The basic cash equivalent calculation for benefits (provided to directors & P11D employees) is the cost to the employer for providing the goods or services less the amount made good by the director/employee. Difficulties can arise when trying to ascertain the cost of the benefit if it is: -
  • provided by the employer during their normal course of business or
  • an existing inhouse service or facility that the employer already provides.

Tax Case Pepper v Hart 1992

This case tested the meaning of cost to the employer. It revolved around the how much Inspector of Taxes, Pepper wished to assess ten schoolmasters lead by Mr Hart who worked in a private school, for school fees relating to their children’s attendance there. HMRC wanted to assess the direct costs of the in-house benefit (i.e. apportioning the whole school running costs by the number of pupils). Hart successfully argued that they should only be assessed on any additional marginal costs relating to their children being there. He stated that as the classes were already being provided: -
  • with school teachers being paid,
  • rates and utility costs of the school being met
  • etc.

it would not make much difference whether a class was full or not. The only additional costs of having their children there would be the marginal costs of consumables e.g. schoolbooks and pencils etc.

As the schoolmasters were already paying 20% of the normal school fees they said that this was sufficient to meet any marginal costs.

Marginal cost basis

If you provide in-house benefits to staff, they only have to pay tax on the marginal cost of providing that benefit less the amount made good. In certain circumstances HMRC agree that the marginal cost is negligible therefore there is no taxable benefit e.g.
  • Goods sold at a discount where the employee pays the wholesale price
  • School fees where the teacher pays at least 15% of the normal school fees
  • Professional services firm providing in-house advice to members of staff (as long as this is provided without having to take on extra staff)


This case particularly affected those transport companies that provided free travel to their employees. For example, HMRC used to assess the then British Rail employees on the cost of an annual rail pass as one of their perks was to receive free rail travel. However under the marginal cost basis there was no extra cost to British Rail for running the train service i.e. the train ran to a schedule and would travel if it was empty or full. There would be no additional costs of travel whether or not a British Rail employee was on the train.

This lead to several months of overtime in HMRC offices in the nineties, after they were deluged with repayment claims from delighted British Rail employees who could reclaim their overpaid tax going back 6 years.

Air miles points & rewards

As an extension of Pepper v Hart, HMRC accept that the benefit value of air miles, petrol tokens credit card points etc awarded by a third party are not taxable on the employee as long as they are acquired on the same basis as members of the public. This also applies when these types of awards are accumulated by the employee using company funds i.e. by reimbursement or by use of a corporate card.

How emTax can help

Our consultants have dealt with many marginal cost disputes with HMRC. Recently we helped to save a leading car breakdown recovery company from having to return in-house benefits (for free vehicle recovery membership enjoyed by all staff) by using the principles of Pepper v Hart.

If you have any similar circumstances where you think we can assist you please do not hesitate to contact us.


Keep up to date

Enter your email to keep up to date with our latest employment tax news