From Me to You – Tax Considerations on Gifts and Benefits to Employees
As an employer, there are numerous ways that you can remunerate or reward your employees and encourage their ongoing commitment to the business or company. Such rewards can be monetary, the provision of some form of benefit, or the gift or transfer of an asset.
However, care should be taken when considering such “rewards” or “gifts” as in many cases they are likely to be deemed to be earnings and therefore subject to tax and/or National Insurance Contributions (NICs).
In the recent case of Mullens v HMRC (TC08112), Mr Mullens (the taxpayer) sought to persuade the First-tier Tribunal (FTT) that huge payments he received from Bernie Ecclestone’s businesses, as well as from Ecclestone’s ex-wife and trusts, were gifts that did not relate to business – despite the taxpayer’s involvement as an advisor in Ecclestone’s business interests for 25 years.
The proposed “gifts” (which were made over several tax years) amounted to a little short of £40m. The taxpayer alleged that the earlier payments were made to encourage the taxpayer to resign from his current position with his firm at the time, and the latter payments arose from the personal friendship he had with Bernie Ecclestone’s ex-wife Slavica. However the FTT found in favour of HMRC on 6 out of 7 of the payments, finding that they were taxable as income, as a reward for the taxpayer’s services.
The case demonstrates why care should be taken when providing any form of remuneration, reward, benefit, or transfer of assets where there is an employer/employee or otherwise business relationship.
Below we have considered the taxation of some typical gifts or rewards from employers to employees.
Gifts of Shares
Company owners may wish to incentivise certain key employees to stay with the business by giving them shares. Such a gift would likely be subject to tax under the Employment Related Securities (ERS) legislation, based on the market value of the shares at the time of the gift.
Depending on the circumstances, the employer may be required to operate PAYE on the value of the gift, and deduct income tax and NICs. This can be a significant cost, especially as the employee will not have received any cash.
For completeness, we would note that there is an exception from the ERS rules for gifts of shares where the opportunity to acquire shares is made available in the normal course of the domestic, family or personal relationships of that person.
For example: if a father, on reaching retirement, hands over all the shares in his family company to his son and daughter simply because they are his children, the exception is likely to apply even if both children are also employees of the family company. However each case should be considered on its own circumstances.
Employers wishing to incentivise key staff by offering them shares, may wish to consider an approved employee share option scheme, such as Enterprise Management Incentives (EMIs), or a Company Share Option Plan (CSOP).
Neither the employer nor the employee will need to pay tax on a benefit made to the employee if all of the following apply:
- it cost the employer £50 or less to provide
- it isn’t cash or a cash voucher
- it isn’t a reward for the employee’s work or performance
- it isn’t in the terms of the employee’s contract
Examples of when the exemption would apply include sending flowers to an employee on an event such as a birthday or birth of a child, or the provision of and workplace tea and coffee.
There is no limit on the number of trivial benefits that can be provided in the tax year, except where the individual is a director in a close company.
Provided that the cost per head does not exceed more than £150 per head, then the provision of an office Christmas party or similar function will not be a taxable benefit for the employee. However where the cost is exceeded, the whole amount will be taxable.
If the employer provides two or more functions, all the functions will be exempt provided the total cost per head does not exceed the £150 limit.
An employer may make tax exempt payments to an employee to cover the reasonable additional costs of working from home. This must be under a home working arrangement.
There is no limit to such payments, though HMRC provides that no records need to be kept for payments of up to £6 per week or £312 per year (2021/22 tax year).
Long Service Awards
Where an employee has worked for a business for 20 years or more, a gift of up to £50 per year of service will not be taxable. This exempts gifts such as a gold watch to a long service employee on retirement.
There are numerous tax effective benefits and expenses that employers may wish to consider for their employees. However in many cases, a gift or reward from an employer to an employee will be subject to tax and so care should be taken when considering such gifts.
If you have questions about providing shares or other assets/gifts/benefits to your employees, please contact a member of our team.