The statutory rules that apply in this situation are set out in section 324 of the Income Tax (Earnings and Pensions) Act 2003. The related rules that cover gifts that consist of vouchers are provided in section 270 of the Act.

To avoid confusion in the following notes, the employer of an employee who receives a gift is called the "direct employer" and the company that gives a gift to that employee is called the "third-party provider".

If an employee, or member of the employee's family or household, receives a gift (including a non-cash voucher or credit token) from someone who is not the employer (i.e. a third-party provider) but the gift, nevertheless, arises from the employment, the cost incurred by the provider is taxable on the employee. This situation arise if a third-party provider gives a gift to an employee as an incentive award, perhaps to show appreciation for that person's contribution to a project, or as a reward for the grant of a particular contract.

However, no income tax liability arises if the following conditions are met:

1. the gift is not provided by the employer or a person connected with the employer
   
   
2. neither the employer nor a person connected with the employer has directly or indirectly procured the gift
   
   
3. the gift is not made in recognition of particular services performed by the employee in the course of the employment or in anticipation of such services
   
   
4. the gift is not cash or securities or the use of a service
   
   
5. the total cost to the donor of all the eligible gifts in respect of the employee in question during the tax year does not exceed £;250 (including VAT).

If the gift is a voucher, the voucher must only be capable of being used to obtain goods.

If the total cost of such gifts to one employee exceeds £;250, the whole amount is taxable.

The import of condition 3 above should not be missed. If a third-party provider gives a gift to an employee of another company in recognition of the general business relationship between them, the condition is likely to be satisfied. But, if the award relates to a "particular" service, the exemption does not apply and the gift is taxable in full.

If the third-party provider wishes to meet the employee's tax liability on a gift that does not meet the conditions of the exemption, this is done through the Taxed Award Scheme.

However, if the third-party provider is on HMRC's list of providers of "other incentive award schemes", i.e. award schemes that are not covered by the Taxed Award Scheme, HMRC will ask the third-party provider to submit P11D Returns in respect of each employee instead of the employee's direct employer doing it. The third-party provider would also incur a Class 1A NICs charge.

The names of third-party providers are added to HMRC's list when direct employers answer 'Yes' to question 3 on the P35 Checklist, i.e. "So far as you know, did anyone else pay expenses or provide benefits or vouchers exchangeable for money, goods or services to any of your employees because they were employed by you during the year?". The direct employer is then asked by HMRC to provide details of the third-party providers involved.

This exemption applies also to business gifts, such as calendars, diaries, and pens etc., which are given routinely by companies to employees of other companies.

Business gifts from employees to their colleagues in other companies

If an employee incurs expenses in providing gifts for employees of other businesses and they are reimbursed by the direct employer, those expenses must be reported in full in the Expenses section of form P11D.

However, under provisions relating to business deduction claims in section 356 of ITEPA, a deduction from earnings would be allowed if the gift incorporates a conspicuous advertisement for the employer (or, if the employer is a company, another company which belongs to the same group as the employer). The exemption applies to gifts such as calendars, diaries and pens and other stationery items. However, the exemption does not apply if

1. the gift is food, drink, tobacco or a token or voucher exchangeable for goods, or
   
   
2. the cost of the gift to the donor, together with any other gifts (except food, drink, tobacco or tokens or vouchers exchangeable for goods) given to the same person in the same tax year, is more than £;50.

An employer may be able to obtain a dispensation if the exemption applies, in order to avoid reporting the benefit.

...back to 23 February 2006

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