Beware the trivial benefits gift card trap

The tax exemption for trivial benefits is a handy exemption as it allows employers to provide employees with low cost benefits tax-free. However, where the benefit is in the form of the gift card, it is easy to fall foul of the rules inadvertently.

Scope of the exemption

The trivial benefits exemption applies where the cost to the employer of providing the benefit is not more than £50 and the following conditions are met:

• the benefit is in kind; benefits in the form of cash or a voucher that is redeemable for cash do not count;
• the benefit is not given in return for work done; and
• the benefit is not provided under a salary sacrifice or flexible remuneration arrangement.

The value of trivial benefits that can be provided to a director of a close company is capped at £300 per year; otherwise there is no limit on the number of trivial benefits that an employee can enjoy in a tax year.

The problem with gift cards

At first sight, providing an employee with a gift card which is topped up at regular intervals may seem a handy way to take advantage of the trivial benefits exemption. It would be reasonable to assume that as long as each top up is less than £50 and the other conditions for the exemption to apply are met, the top-ups would all be tax-free. However, HMRC take a different view. Their stance is that the benefit of the gift card is a single benefit and the cost of that benefit is the total amount put on the card throughout the tax year.

Example

An employer wishes to take advantage of the trivial benefits exemption and provides an employee with a gift card for a popular store. The initial gift card cost the employer £20. The employer tops up the gift card by a further £20 each month. As each top-up is less than £50, the employer is confident that the trivial benefits exemption applies.

However, HMRC’s position is that the cost to the employer of providing the benefit for the tax year in question is £240 (12 x £20). As this is more than £50, the trivial benefits exemption does not apply. The benefit is taxable as a benefit in kind and is also liable to employer Class 1A National Insurance. It must also be reported to HMRC on the employee’s P11D.

A similar problem could arise with the provision of a season ticket.

Individual benefits

To avoid falling foul of the gift card trap, make sure each benefit is separate from other benefits given to the employee in a tax year. Where gift cards are used, give the employee a separate gift card each time (perhaps varying the type of card), rather than simply topping up an existing card.