Navigating Gift Vouchers for Directors and Employees: Understanding Tax Implications with HMRC

Many of you are considering rewarding yourselves, as directors, and your dedicated employees with gift vouchers. This gesture not only boosts morale but also demonstrates appreciation for the hard work and commitment throughout the year.

But  - it's crucial to understand the tax implications of such gifts to ensure compliance with HMRC regulations and to optimise tax efficiency for both your company and its recipients.

For Employees:

Trivial Benefits, what are they?

Gift vouchers provided to employees can often be considered "trivial benefits" under HMRC guidelines.

To qualify, each gift must not exceed £50 in value, cannot be cash or a cash voucher, must not be a reward for particular services, and must not be included in the terms of an employee’s contract.

If these conditions are met, the gift is exempt from tax and does not need to be reported to HMRC.

Example: Celebrating an Employee's Birthday

Imagine that your company wishes to mark an employee's birthday by giving them a gift voucher. To ensure this gesture falls under the category of a trivial benefit, thus making it tax-exempt, the company must adhere to the following HMRC criteria:

Cost: The cost of the gift voucher does not exceed £50 (including VAT). This cap is per benefit (gift), not per year, for each employee.

Not Cash or a Cash Voucher: The gift is not given in the form of cash or a cash voucher. A gift voucher that is non-exchangeable for cash but can be used in specific stores meets this criterion. (A jungle-based retailer for instance 😁)

Not a Reward for Work: The gift voucher is not given as a reward for the employee’s work or performance. In this case, the voucher is given purely in recognition of your employee's birthday, which is unrelated to their job performance.

Not in the Terms of the Contract: The benefit is not stipulated in the employee’s contract or any other obligatory terms.

By giving a gift voucher under these circumstances, the company effectively uses the trivial benefits exemption to provide a tax-efficient token of appreciation.

The employee (hopefully) enjoys the gesture without any tax implications, and the company does not have to report this benefit to HMRC or pay any additional taxes on it.

Non-Trivial Benefits:

Gifts exceeding the £50 threshold, or not meeting all of the criteria above, are subject to tax and National Insurance contributions. These need to be reported through your payroll or on the employee’s P11D form.

Fortunately, your company can alleviate the tax burden on employees by settling any tax liabilities on their behalf through a PAYE Settlement Agreement (PSA) with HMRC.

For Directors:

The treatment of gift vouchers for directors, particularly in small companies where directors are also shareholders, can be more complex due to their dual roles.

Trivial Benefits for Directors:

The same trivial benefits rule applies to directors but with an additional caveat: there’s an annual cap of £300 on the total value of trivial benefits a director of a close company (one controlled by five or fewer shareholders) can receive each tax year. Staying within this limit ensures these benefits remain tax-exempt.

Example: Appreciation Gift Voucher for a Director

Suppose a close company decides to give one of its directors a gift voucher as a token of appreciation for successfully leading a project.

The value of the gift voucher is £40, and it is a one-time gesture that is not related to the director's performance or contractual obligations.

Additionally, the company has not given any other trivial benefits to this director during the tax year that would collectively exceed the annual exemption limit of £300 for directors of close companies.

In this scenario, the gift voucher would be considered trivial for several reasons:

Value Within the Threshold: The value of the gift voucher (£40) is below the £50 threshold set by HMRC for trivial benefits. This makes it exempt from tax as it does not exceed the per-occasion limit.

Not Cash or a Cash Voucher: Assuming the voucher is not exchangeable for cash, it meets the requirement of not being a cash or cash-equivalent voucher.

Not a Reward for Specific Services: The voucher is given as a token of appreciation for leading a project, which can be seen as a gesture of goodwill rather than a direct reward for services performed, making it compliant with HMRC's criteria for trivial benefits.

Annual Cap Not Exceeded: The director has not received trivial benefits exceeding the annual cap of £300 from the company in the relevant tax year, ensuring the gift remains within the allowed limit for trivial benefits.

As a result, this gift voucher is tax-exempt and does not need to be reported to HMRC by either the director or the company.

It's a straightforward example of how companies can use the trivial benefits rule to provide tax-efficient tokens of appreciation to their directors without incurring additional tax liabilities or administrative burdens.

Non-Trivial Benefits:

Gift vouchers given to directors that exceed the trivial benefit limits or the annual cap are considered additional income and must be declared on Self-Assessment tax returns.

These are subject to Income Tax and potentially National Insurance contributions, depending on the structure of the payment.

Reporting and Compliance:

It's imperative to keep accurate records of all gifts provided to ensure compliance with HMRC regulations.

This includes documenting the nature of the gift, its value, the recipient, and the date given. Such diligence aids in the smooth handling of HMRC inquiries and audits.

We will need to register the company for employee benefits to be able to report these benefits through P11D. Each employee and director will receive a P11D with their P60 at the end of the tax year that needs to be included in the self-assessment tax return

Summing up:

Gifting vouchers can be a wonderful way to show appreciation to your team and yourself as directors.

But navigating the tax implications requires careful consideration to ensure compliance and optimise tax positions.

As always, we recommend consulting with our team as we are here to assist you with any questions you may have and to provide support in managing the tax aspects of your employee and director benefits.