Can Employees Have Their Birthday Cake and Still Eat It?

Birthdays, births, anniversaries or long service awards are all important milestones in the workplace. Often acknowledged in the office by employers with the presentation of a small gift, whether it is a cake, flowers or bottle of wine, it can be a great way of developing staff morale, team-building and a sense of belonging. Presenting birthday cakes or other ’small’ gifts, whether for celebration, or a reward for winning a new contract, producing an exceptional piece of work or simply for being with an organisation a long time is often common practise for British businesses. But what constitutes ’small’? How much can employers spend? How should employees treat this for tax purposes and what is the Inland Revenue’s take on this arrangement?

Quite simply, can employers and employees have their birthday cake and still eat it?

Alison Smith, Managing Director of payroll specialist company activpayroll says, As employers we all know it is vital that we create a working culture that is fun, challenging and satisfying. We all like to witness hard work, determination and ability in the workplace. Rewarding employees with a small token of thanks can be a great way of instilling self-esteem, sense of achievement and employee loyalty.

Tax liabilities on minor benefits appear to cause some confusion for employers. Although there is no formal announcement from the Inland Revenue on how this situation should be treated, employers must be aware of the liability on ’small’ gifts still remains.

If minor benefits are not reported in a correct manner there can be implications for both the employer and the employee. On the one hand an employee is held liable for any tax liabilities incurred by benefits in kind. In this case the employer would be asked to submit a correct P11D showing the total benefit in kind. The employer, however, may choose to settle the employees tax liability if they wish. Potentially an employer could be fined by the Inland Revenue if they have not reported the benefit on a P11D.

However, since December 2003, Revenue staff have been instructed to exercise judgement and decide if the gift is regarded as trivial or not. Regardless of the number of employees concerned, and the cost to the employer, gifts such as birthday cakes, bottles of wine and flowers should be regarded as trivial and thus free from tax liabilities.

Alison adds, Some clarity, however, is required to ascertain what constitutes ’small’. Some companies, such as family owned businesses might regard a 10 gift voucher as an appropriate gift for employees, whereas a national corporation, with a turnover of several million pounds might view a 100 hamper as a suitable gift.

With no official line from the Inland Revenue the confusion is set to continue. The tax liability on gifts still remains and there has been no change to tax legislation. I would recommend that employers seek advice and contact the PAYE tax office and request a written agreement that employee gifts are exempt and need not be reported.

Alison continues, Another scenario an employer can find themselves in concerning tax liabilities on employee gifts are the implications of gifts and long service.

For employees serving 20 or more years a revenue concession allows for tax not to be charged, when the gift takes the form of tangible articles of reasonable cost and no other similar gift has been given previously. This must be presented as a long service award and reasonable cost is taken to be up to 20 per year of service.

Employers wishing to thank employees of one of its suppliers for their contribution to the successful completion of a project, often give tangible gifts or seek to provide corporate entertainment. If the entertainment is interpreted as an incentive for completing the project or achieving targets it is regarded as a taxable benefit. This will not be the case, however, if the entertainment or gift is intended to further business relationships between the employer and the third party.

To avoid any tax and NICs liabilities the employer must fulfil this criteria and ensure that gifts are in the form of goods, or vouchers to obtain goods. The employer must ensure that any goods gifted to a third party must not exceed 150 (inclusive of VAT) in the tax year.

Up and down the length and breadth of the United Kingdom, throughout all types of business and organisation, employers are keen to reward their staff with small benefits for a multitude of various reasons, continues Alison. Employers must be award of tax legislation in this matter and act in an appropriate manner to avoid being responsible of tax and NICs liabilities.