The legal minefields of tax-efficient benefits

Before employers start to think about the tax efficiency of their employee benefits offering, they need to consider the business rationale for their policies. 

Moustrap minefield

If you read nothing else, read this:

  • Employers should consider the business reasons behind their reward policies.
  • Employers must be aware of any tax or national insurance consequences of providing benefits.
  • They should include any tax considerations when planning and budgeting.

Once they are certain that they know what each policy is intended to achieve, then tax law is only one of the legal codes that needs to be considered.

Other considerations for prudent employers include health and safety responsibilities such as food handling for working lunches; employment law, including discrimination in its many unintended forms (failing to offer an employer-provided uniform for the one male receptionist in the team of five, gifts of wine for those whose religion prohibits alcohol, computer screens that cannot be adjusted for those wearing reading glasses); and data protection.

The old adage about not letting the tax tail wag the commercial dog remains true in relation to employee benefits.

To this can be added two more maxims. The first is that just because it makes good business sense to provide employees with a particular facility or benefit, there will not necessarily be a corresponding tax break.

The second, that employers can provide their employees with any (legal) benefits or payments that they choose, comes with the caveat that those employers still need to get the tax reporting and payment consequences correct. 

So just because there is a tax and national insurance contribution (NIC) exemption for an annual party or similar event that costs no more than £150 per head, employers are not prevented from offering a more costly event. They may have extra reporting processes and additional tax and NICs to pay if they wish to avoid their employees getting a tax bill, but that is their choice.

Difficulties when providing benefits in kind to employees

Employers must also consider possible difficulties that they may have when providing benefits in kind to employees, particularly in recognising that there could be a tax or NIC consequence.

Delegating responsibilities to line managers may be operationally effective for employers, but unless those managers are unusually tax aware, unexpected employer costs, plus interest and even penalties, can arise when benefits are provided. 

Similarly, employers must consider the possible danger of missing a key detail that is needed if an exemption is to apply.

For example, if a staff party is to escape tax as a benefit in kind, it needs to be open to all employees at the same workplace, as a managers-only event will not qualify. Not only that, but it must be an annual event. It is very unlikely that a one-off celebration will qualify for the tax and NICs exemption.

Many exemptions come with a monetary limit. Tax-free incidental overnight expenses are £5 per night, averaged over a UK trip, or £10 overseas. The £150 per head for annual parties is well known. Employers that exceed these limits will find that the entire cost becomes taxable, not simply the excess.

Embed tax considerations into all planning

Employers should embed tax considerations into all planning and budgeting, and keep a record of the steps that are taken. An employer should be able to show that ‘reasonable care’ was taken to get its tax and NICs position right, because this can go a long way in reducing or even cancelling any penalties. This may involve checking on HM Revenue and Customs’ (HMRC’s) website pages or consulting a professional tax adviser.

Key to planning is thinking ahead, particularly given employers’ new reporting requirements. Only a handful of unusual employers are outside HMRC’s real-time information (RTI) requirements now, so reporting is not necessarily only a year-end exercise. For example, gift vouchers used as incentives bring a NICs cost through payroll on or before the time that they are given out. This can be avoided, but only if the employer already has a PAYE Settlement Agreement in place with HMRC. 

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Ultimately, employers must be mindful of the fact that almost nothing in relation to compliance with income tax and NIC rules is simple. If there is a tax exemption, there is almost certainly a set of essential requirements and probably some exceptions too.

Lesley Fidler is tax director at Baker Tilly