An employer gives two bottles of wine to employees each year as a gift in appreciation for their contribution to the business. Can the tax liability be included in a PAYE Settlement Agreement?

The simple answer is that the gifts are unlikely to be taxable at all. In the guidance given in the Inland Revenue's Employment Income Manual, bottles of wine are included among a number of types of gifts that are treated as "trivial" in nature and, therefore, not reportable on form P11D. As they are not reportable, there is no reason for the employer to consider including them in a PAYE Settlement Agreement (PSA) in order to meet the tax and NICs charges instead of the employee.

One employer's tax office wrote to the employer recently about the only items of that employer's PSA, bottles of wine as gifts for 12 employees, with a total value of £;219. The tax inspector wrote:



"I have reduced your calculation by £;219 (shown in your computation as Bottles of wine). New legislation for 2003/04 states that items of a minor/trivial nature can be removed from the overall liability. I can confirm that, as the information supplied in your letter meets this criteria, the 'Gifts of bottles of wine' stated as a value of £;219 can fall within this category of 'Trivial Benefits'. This means that the £;219 Benefit for 2003/04 will be ignored for tax purposes. There will be no need to complete P11Ds for this item and also no need to enter into a PAYE Settlement Agreement for subsequent years unless the circumstances or individual cost changes in any way. If this should happen, you will need to notify me and I will review the situation again."



The letter refers to "new legislation" but, in fact, there is no such new legislation. The "minor benefits" provisions of section 210 of the Income Tax (Earnings and Pensions) 2003 refer only to benefits for which exemption is specifically provided under Regulations, such as welfare counselling. There is no statutory limit below which benefits are not taxable. The treatment of gifts as "trivial" because the benefit on the employee is not worth pursuing is a concession by the Inland Revenue. Inspectors are given the following guidance:

• a benefit that is a reward for specific services is always taxable, whatever its value
  
  
• a benefit in the form of cash or vouchers is always taxable, whatever its value
  
  
• a benefit that is related to staff welfare may be treated as a trivial benefit
  
  
• if a gift is trivial for one employee, it is also trivial for 100 employees, or for 1,000 employees, even though the cost to the employer may be considerable
  
  
• the term "trivial" is not viewed relative to the level of an employee's income or to the amount of the employer's costs; rather it is viewed relative to:
  
  
  • the work involved in completing the P11Ds by the employer
  • the cost to the Inland Revenue in handling and processing the returns and in issuing coding notices.

Examples given by the Inland Revenue of benefits that are related to staff welfare include

• small gifts in recognition of a particular event, such as an employee's marriage or the birth of a child
  
  
• seasonal gifts such as a turkey, bottle of wine, or a box of chocolates at Christmas. But, if the gift extends to a case of wine, or to a hamper of food, the inspector may decide not treat them as "trivial".

Based on the criteria given above, employers should be able to distinguish between

• a box of chocolates given to an employee for achieving weekly targets and the same gift given to all employees at Christmas
  
  
• a turkey given to an employee at Christmas and a voucher given to an employee at Christmas that may be redeemed at a local retailer for a turkey.

Some employers have historically included such "trivial" gifts in a PSA, dating back to the time when the Inland Revenue did not take such an enlightened view of gifts. It would be sensible for them to contact their tax office and renegotiate the agreement.

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...back to 8 October 2004

Further information:
www.inlandrevenue.gov.uk/manuals/eimanual/eim21860.htm and following pages