Is the provision of licensed and perishable goods taxable for employees with an earnings rate of less than £8,500?

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A core principle of the tax rules for employment benefits is the "money's worth" principle. Section 62 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) says that earnings for tax purposes include "any gratuity or other profit or incidental benefit of any kind obtained by the employee if it is money or money's worth". Something is "money's worth" if it is

• of direct monetary value to the employee, or
  
  
• capable of being converted into money or something of direct monetary value to the employee.

This is a universal rule; it applies to all employees, irrespective of their level of earnings. If an employee receives a benefit of any kind and is then able to obtain money from having that benefit, its taxable value is the amount of money that the employee could obtain – usually its second-hand value or the market value. If the employee cannot obtain money from the benefit, there is a reportable benefit. It does not matter that an employee does not actually obtain money for the item; it is enough that the item is "capable of being converted into money".

However, the "money's worth" principle is usually superseded by the tax rules set out in the various chapters of the Benefits Code, a detailed set of rules in ITEPA that cover such benefits as vouchers, cars, vans, loans and living accommodation. There is also a "catch-all" chapter, Chapter 10, entitled Residual Liability to Charge, which picks up on most benefits for which the tax liabilities are not otherwise defined. Chapter 10 provides rules for calculating the taxable value of assets whose ownership is transferred to employees, e.g. gifts and awards. In general, the value reported for tax purposes is the cost incurred by the employer in providing the benefit. Where there is taxable benefit provided that falls within the Chapter 10 rules, the value of the benefit is reported on form P11D.

In almost all cases, the reportable value of a benefit calculated under the Benefits Code rules is higher than any "money's worth" value it might have. As a result, the "money's worth" value is ignored.

However, Chapter 10 of the Benefits Code does not apply to "lower-paid employee", i.e. employees whose "earnings rate" is less than £8,500. Form P9D is used to report benefits provided for lower-paid employees. An employee's earnings rate is the employee's taxable earnings for the year, including the value of any benefits and expenses provided. In general, only part-time employees fall into this definition.

Because the Chapter 10 rules do not apply to "lower-paid employees", there is no Benefits Code tax charge on the gifts or awards that they receive, as long as what would otherwise be the Chapter 10 value of the benefits does not take their earnings rate over £8,500. That does not mean, however, that there may be nothing to report on form P9D. Even though there may not be a Chapter 10 charge, the employer must still consider whether or not there is an underlying "money's worth" to report.

So, for example, if a lower-paid employee receives a gift or award of some kind, the employer must decide what the second-hand or market value of the asset is and report that on form P9D.

The question under discussion here is whether there is a "money's worth" charge to tax when licensed goods (e.g. wine and spirits, cigarettes and petrol) and perishable goods (e.g. meat, fresh produce, dairy produce) are provided to lower-paid employees. Are they "capable of being converted into money"?

Taking licensed goods first, it is illegal to sell licensed goods without a license. However, it is clearly possible for employees to sell wines and spirits, petrol and cigarettes to their friends. On Ebay, there are plenty of examples of wines, spirits and cigarettes being auctioned, often (but not always) as collectors' items rather than for consumption.

Nevertheless, HMRC's view on the tax treatment of licensed goods is clear. Page EIM21640 of HMRC's Employment Income Manual, refers to "items like wines and spirits or petrol, which the employee cannot lawfully turn into money". As long as the employee does not have a license, licensed goods have no money's worth and are not, as a result, reported on form P9D. This means that, if an employer were to give a case of wine or a tankful of petrol to employees, there would be a Benefits Code tax charge for all of them except for lower-paid employees.

The situation with perishable goods is not so clear. If a lower-paid employee is given fresh meat or produce, e.g. a fresh turkey at Christmas, the employer must decide whether such goods have a second-hand value to the employee. In the Employment Income Manual, HMRC only comments on perishable goods in the context of "trivial benefits", i.e. low value benefits, but includes as examples perishable items such as a Christmas turkey or flowers for an employee in hospital. The emphasis is on the value of the benefit, not on whether or not it is perishable. In response to a question on this subject, HMRC stated that this decision is "a question of using common sense". The employer may consider whether it is reasonably practicable for an employee to take the items to a market to sell. Is it likely that a local shop would buy the items for resale? If the goods are frozen, can the employee resell the item frozen, or will it have thawed out before the employee gets home? Employers in this situation should keep records of the supply of such goods and the rationale for not reporting them on form P9D.

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