There are special rules for taxing job-related perks for employees but do they apply to staff discounts on goods or services that your firm sells to the public?
Alternative ways to pay
Perks can play an important part of an employee’s pay package and if they are tax efficient, all the better. It’s therefore important that you understand the tax and NI consequences of giving them for your business as well as for your employees. Some benefits use special rules to value the amount liable to tax and NI, e.g. company cars, otherwise the so-called residual charge applies.
Residual charge
In essence, the residual charge is how much the benefit costs you, the employer, to provide. This isn’t necessarily simple to work out and HMRC got itself in a tangle some years ago when it concluded that for in-house benefits, the cost, and therefore taxable amount, was equal to what the business charged its customers. It took the House of Lords to put HMRC right and set the standard which has remained undisputed ever since. The case (Pepper v Hart 1992) involved a private school which gave its teachers a discount if their children were pupils.
Marginal cost
The cost of providing education for one child was almost impossible to work out, but that didn’t alter how the residual charge was arrived at. The Lords’ decision was that it cost the school nothing to provide the basic education and therefore it was only the extra (marginal) cost which counted as the taxable amount. For example, food, laundry and stationery, but not a share of the total running costs of the school. This principle can be used for any in-house benefit.
Example. Acom Ltd is a plumbing firm that gives a 50% discount on labour costs for work provided to its employees’ immediate family. It costs a job at ten hours’ labour £450 (normal rate £45 per hour), plus parts at normal charging rates, say, £150 (actual cost to it of £80). It charges £375 for the work. The taxable benefit is the cost of the employee’s wage (including employers’ NI), plus parts to Acom and any other costs directly associated with the job; in this example there are none (general overheads are ignored), less what the customer paid. Assuming the wages plus NI were £170 (£17 per hour), there is no taxable benefit because the cost to Acom is £250 (£170 labour + £80 parts) and it was paid £375 for the work.
Tip. In simple terms if the amount of discount is less than the amount paid for the goods or services in total there’s no taxable benefit.
Discounts in practice
Sometimes a taxable benefit can be easy to work out. For example, if you’re a retailer who gives staff a 25% discount on all goods and your mark-up is always 75%, you can be sure there’s no taxable benefit. In other cases, such as in our example, your costing process for a job should allow you to establish if a discount results in a taxable benefit. Remember to include any costs you incur which are specific to the job, e.g. delivery charges for parts. However, you can ignore them if the parts etc. arrive as part of a general delivery charge.
Tip. To avoid staff discounts becoming taxable benefits, which is a hassle for you and the employee, do your costs before deciding on the rate or amount of discount.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.