Policy paper

Income Tax: statutory exemption for trivial benefits in kind

Published 9 December 2015

Who is likely to be affected

Individuals who currently pay income tax and Class 1 National Insurance contributions (NICs) on certain low value benefits-in-kind (BiKs) provided by their employer.

Any employer who provides their employees with certain low value BiKs which will, in certain circumstances, become exempt from income tax and NICs.

General description of the measure

The measure will introduce a statutory exemption which will exempt from income tax and NICs low-value BiKs which meet certain qualifying conditions including a £50 limit per individual BiK. Qualifying ‘trivial’ BiKs provided to directors or other office holders of close companies, or to members of their families or households, will be subject to an annual cap of £300.

Policy objective

Employers are currently required to agree with HM Revenue and Customs (HMRC) whether certain BiKs can be treated as trivial. This is a burdensome process for both employers and HMRC, and is disproportionate to the amounts of tax and NICs due. The introduction of a statutory exemption will deliver a simplification of the existing process. This will create certainty and transparency for employers as to the treatment of such BiKs and reduce the administrative costs for both employers and HMRC.

Background to the measure

The measure was announced at Budget 2014 as part of a package of measures aimed at simplifying the administration of employee BiKs and expenses. This followed a review of employee BiKs and expenses, published by the Office for Tax Simplification (OTS) in January 2014.

A consultation document titled ‘Employee Benefits and Expenses - Trivial Benefits exemption’ was published on 18 June 2014. The consultation closed on 9 September 2014 and a summary of responses was published on 10 December 2014 alongside draft legislation.

Following a technical consultation, an annual cap of £300 for directors and other office holders of close companies and members of their families and households who are also employees of the company was included in the measure.

This measure was announced at March Budget 2015 and originally intended for the first Finance Bill of 2015, but in recognition of the accelerated parliamentary process that the Finance Bill was subject to, the legislation was deferred to 2016.

This tax information and impact note (TIIN) updates and replaces the TIIN published on 10 December 2014.

Detailed proposal

Operative date

This measure will have effect on and after 6 April 2016.

Current law

Employers are currently required to report all BiKs and expenses provided to their employees annually on forms P11D or P9D and, for Class 1A NICs purposes, P11D(b). There is currently no minimum cost threshold for BiKs having a tax charge or NICs liability and being reported to HMRC. However, employers can apply to HMRC for agreement to exclude BiKs on the grounds that they are ‘trivial’. The arrangements are made on a discretionary basis under HMRC’s collection and management powers: HMRC takes certain factors into consideration when deciding whether to agree to such arrangements. When HMRC agrees that the BiKs are trivial, by concession the employer does not have to report them to HMRC and there is no charge to income tax for the employee nor Class 1A NICs liability for the employer.

The Income Tax (Earnings and Pensions) Act 2003 (ITEPA) imposes a charge to income tax on employment income. Section 6(1) of ITEPA provides that the charge to tax on employment income is a charge to tax on general earnings and specific employment income. Section 7(5) of ITEPA provides that anything within the benefits code is treated as earnings.

The benefits code is set out in Chapters 2 to 10 of Part 3 of ITEPA.

Section 716 of ITEPA sets out that HM Treasury may, by order, increase the sums of money specified in certain legislation and section 717 ITEPA sets out how any Treasury orders are to be made.

Section 10 of the Social Security Contributions and Benefits Act 1992 (SSCBA) imposes a Class 1A NICs liability on BiKs where there is a charge to tax on general earnings and for which no Class 1 NICs are due.

For NICs purposes, certain BiKs (including some non-cash vouchers) are treated as earnings and liable for Class 1 NICs. Section 3 (3) of the SSCBA provides for regulations to be made to disregard certain payments from a person’s earnings. Regulation 25 of the Social Security (Contributions) Regulations 2001 (SSCR) and Schedule 3 of the SSCR provide for these disregards.

Proposed revisions

Legislation will be introduced in Finance Bill 2016 to amend Chapter 11 of Part 4 of ITEPA to provide a statutory definition of a trivial BiK. The exemption sets out a number of conditions that must be met for a BiK to be exempt, including an upper limit per individual BiK of £50.

Qualifying trivial BiKs provided to directors and other office holders of close companies will be subject to an annual cap of £300. Where the director’s or other office holder’s family or household member is also an employee of the company, they will be subject to a £300 cap in their own right. This change addresses a potential loophole.

The legislation will also amend section 716(2) (alterations of amount by Treasury order) and section 717(4) (orders and regulations made by Treasury or Commissioners) to enable the Treasury to make regulations amending both the upper limit per individual BiK, the level of the annual monetary cap, and the conditions of the exemption.

A Statutory Instrument will be laid to disregard from the calculation of earnings attracting a Class 1 NICs liability any non-cash vouchers provided that meet the trivial BiKs exemption. This means that an employer or employee will not be liable to pay Class 1 NICs on any qualifying non-cash vouchers. Where trivial BIKs (other than non-cash vouchers) are provided that meet the trivial BIKs exemption, there will be no Class 1A NICs liability for the employer.

A Statutory Instrument will also be laid to extend the exemption to qualifying BiKs provided to former employees, by amending the Employer-Financed Retirement Benefits (Excluded Benefits for Tax Purposes) Regulations 2007 (EFRBS).

Statutory Instruments to give effect to the NICs and EFRBS changes were published in draft for consultation on 9 December 2015.

Summary of impacts

Exchequer impact (£m)

2015 to 2016	2016 to 2017	2017 to 2018	2018 to 2019	2019 to 2020
-	-5	-10	-10	-10

The Exchequer impact of the revised implementation date will be set out at Budget 2016, and will be subject to scrutiny by the Office for Budget Responsibility.

The figures for 2016 to 2017 (which is now the year of implementation) and later years are set out in Table 2.1 of Autumn Statement 2014 as ‘Office of Tax Simplification: Review of Expenses’, and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Autumn Statement 2014.

These figures also incorporate the Exchequer impact of ‘Income tax: abolition of the £8,500 threshold for benefits in kind’ and ‘Real time collection of tax on benefits in kind and expenses through voluntary payrolling’.

Economic impact

The measure is not expected to have any significant macroeconomic impacts.

Impact on individuals, households and families

This measure is not expected to have a significant impact on individuals and households or on family formation, stability or breakdown.

Some employees will no longer have to pay income tax on certain BiKs currently included on forms P11D or P9D. It is not possible to estimate how many employees will be affected.

Equalities impacts

HMRC does not hold data on the protected characteristics of those affected, but the measure is not expected to have equality impacts on groups sharing protected characteristics.

Impact on business including civil society organisations

This measure is expected to deliver savings in administrative costs for those businesses and civil society organisations that provide qualifying trivial BiKs, as it will reduce the burden associated with filing P11Ds and making PSA applications. The ongoing administrative savings are expected to be negligible.

Operational impact (£m) (HMRC or other)

The measure is expected to deliver an administrative saving for HMRC as a result of a reduced number of BiKs recorded on P11D forms and PSA agreements. The administrative savings are anticipated to be negligible.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

The measure will be monitored and assessed through communication with affected taxpayer groups. The legislation also includes provision for the monetary limit for individual trivial BiKs to be uprated in the future. The government will keep the monetary limit, other qualifying conditions and the annual cap under review.

Further advice

If you have any questions about this change, please contact the Employment Income Policy Team on email: employmentincome.policy@hmrc.gsi.gov.uk