Tax Implications Gifts to Employees

In the realm of employee compensation and benefits, the taxation of gifts can be a complex issue. This comprehensive guide will help employers and employees understand the tax implications of gifts, such as cash gifts and gifts with money’s worth, and provide insights from relevant legal cases.

According to the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003), cash gifts or gifts with money’s worth that arise from employment are considered earnings and taxable under section 62. However, if the gift is in the form of goods or services with no money’s worth, it is not taxable as earnings under section 62; it may be taxable under the benefits code or exempt under certain conditions.

In Gain Capital Ltd v HM Revenue & Customs (HMRC), the taxation of cash gifts given to employees in recognition of past services was examined. The judge ruled that the cash gifts were derived from employment, making them taxable as earnings. This case emphasizes the importance of understanding the tax implications of cash payments connected to employment, even if they relate to past services.

Furthermore, four additional cases illustrate various situations where gifts can be chargeable as earnings:

1. Herbert v McQuade: A clergyman received a grant based on the duties, incomings, and outgoings of his benefice, which was held to be a chargeable emolument.
2. Cooper v Blakiston: A vicar received Easter offerings regarding his services as an incumbent, and the offerings were deemed chargeable emoluments.
3. Denny v Reed: A managing clerk received discretionary payments regarding work done for the firm, which were considered chargeable emoluments.
4. Moorhouse v Dooland: A cricketer received collections for meritorious performance, which were held to be chargeable emoluments due to his entitlement under his contract.

Understanding the tax implications of gifts to employees is crucial for employers and employees. For example, cash gifts or gifts with money’s worth arising from employment are generally taxable as earnings, while gifts in the form of goods or services may be taxable under the benefits code or exempt under certain conditions. Awareness of these rules and the relevant legal cases can help avoid potential tax liabilities and ensure compliance with tax laws.

If you need help to plan your taxes, please contact Tax Accountant at 0800 135 7323 or email info@taxaccountant.co.uk for expert advice.