HMRC has provided various “interpretations” of the rules for trivial benefits in the last three employer bulletins, as it apparently views those rules as too generous.
From 6 April 2016, the government introduced a new exemption for trivial benefits (ITEPA 2003 s 323A). Tax advisors were encouraged by this new law as it provided welcome clarity of the value of benefits which could be classed as trivial, and the fact that gift vouchers were in scope if provided for appropriate reasons.
The introduction of the exemption had been delayed by a year because of concerns that the extension might be abused, particularly by close companies. To this end, close companies were given an annual exemption cap of £300, rather than unlimited trivial benefits which can be provided to employees, as long as each individual event meets the terms of the exemption.
The August 2019 Employer bulletin was a simple restating of the rules and contained nothing contentious.
The October 2019 Employer bulletin focused particularly on a sequence of benefits with two examples relating to employers providing a benefit over a number of months during a tax year. On each occasion that the benefit was provided the value was under £50, but the overall cost of the benefit exceeded £50, so the trivial benefits exemption was not appropriate. This was a reasoned interpretation of the legislation.
In the December 2019 Employer bulletin, HMRC went much further and said that any benefit provided regularly would fail the exemption as the employees would have a ‘legitimate expectation’ of its provision.
This is the first time that a legitimate expectation condition has been referred to in relation to trivial benefits. The legislation in ITEPA 2003 s 323A says that one of the conditions for the exemption to apply is that: “the employee is not entitled to the benefit as part of any contractual obligation (including under salary sacrifice arrangements)”.
The brief employer guidance on trivial benefits simply says for the exemption to be appropriate: “it isn’t in the terms of their contract”. This is reiterated in the August Employer bulletin when HMRC says: “Is there a contractual obligation to provide the benefit? A good test is whether your employee would have legal grounds to object if you didn’t provide the benefit”.
What is a contractual obligation?
- A side letter to the main contract document
- A staff handbook
- A letter of appointment
- A redundancy agreement
- An employer union agreement
All of the above would absolutely form the basis of a contractual term that the employee would have a grievance about if it was withdrawn.
The EIM does not use the phrase “legitimate expectation” but it seems that HMRC has decided that “legitimate expectation” can be considered under the final direction to HMRC staff given in the EIM which is to “consider all possible contractual sources”.
Is cake a meal?
The example in the December employer bulletin of a legitimate expectation of an employee is the provision of a cream cake every Friday.
I‘m curious how this cake provision interacts with the catering exemption in ITEPA 2003 s317. That exemption requires that a “meal” is provided to all employees at one location, but not on every day of the week. In fact, there is an example in EIM21673 of food provided only twice a week. EIM05231 defines a meal as “a combination of food and drink”.
If the employer provided a coffee and a cream cake every Friday, that would that be exempt under ITEPA 2003 s317 as catering? Equally, would employees have “legal grounds to object” if cakes were withdrawn?
Intention to simplify
As HMRC said in the August employer bulletin; “the main reason the exemption was introduced was to remove the administrative burden for employers in reporting the small amounts involved”.
It’s now becoming clear that what had seemed a pragmatic solution to the fact that many employers had never reported low-value benefits on an employee’s P11D or included them in a PAYE settlement agreement, has now become too well utilised. Presumably, it is the removal of items from PSAs that has piqued HMRC’s interest and the concern that there is a loss of tax.
My experience with SMEs since the introduction of the exemption in 2016, is that they are blissfully unaware of the trivial benefit exemption so have either been including items in their PSA or completely ignoring them!
I’ve not heard of any employer being challenged on “legitimate expectation” during a compliance review, but on the basis of the last three issues of the employer bulletin, it certainly seems to be on HMRC’s radar.
I hope that common sense is restored to this subject so that there really is a reduction in the admin burden and that the Employment and Payroll Group get an opportunity to discuss ‘legitimate expectation’ with HMRC once purdah has been lifted.