The Hardware Journal asked Michael O’Leary, Tax Partner at PKF Brenson Lawlor, to update and clarify some issues around the ‘Small Benefit Exemption’ incentive given by employers to employees during the year.
Tax legislation currently allows for up to five tax-free incentives to be provided by the employer to an employee per year. These incentives must be non-cash benefits that cannot be redeemed for cash and usually are in a form of a voucher or other benefit (such as payment of a gym membership or other non-monetary benefit). Total value of the provided benefits should be within “1,500. If a sixth benefit is provided, that benefit is taxable. Similarly, if the total value of the first five benefits exceeds “1,500, the benefit that causes the aggregate value to exceed the “1,500 limit will be taxable, as well as any following benefits. In addition, it is required that a provision of the benefit does not constitute a salary sacrifice
arrangement.
Generally, these benefits are not treated as part of the remuneration package subject to tax. However, it appears that recently certain small benefits provided by some employers to their employees caught Revenue’s attention. Certain small benefits which do not satisfy the relevant requirements as outlined above, are deemed to be provided under a salary sacrifice arrangement.
This is particularly relevant where an arrangement is established under which an employee forgoes the right to any part of salary or bonus due to them as part of their remuneration package in return for a small benefit provided by the employer. Therefore, an employee cannot agree to have their salary / bonus reduced in exchange for the receipt of same in a form of a ‘‘small benefit’’. This appears to apply to both written formal agreements and to informal arrangements by way of which a reasonable expectation to the small benefit is established.
Any small benefits provided to the employee must be reported to the Revenue Commissioners in real-time under Enhanced Reporting Requirements (‘‘ERR’’).
Therefore, in order to stay compliant with the rules applying to the tax-free small benefits paid to employees, the conditions as outlined above must be satisfied. It should be made clear by the employer that any small benefit is discretionary and cannot be guaranteed based on any arrangements made with employees. Below we outline examples of the benefits provided to employees being (a) a salary sacrifice and therefore does not satisfy the relevant requirements as a tax-free small benefit and (b) being a
tax-free small benefit:
a. Employee agreed to reduce their annual salary by a “1,000 knowing that the company would have a system in place where it would issue a voucher worth “1,000 to certain employees who agreed for their salaries to be reduced respectively. However, that employee has not entered into any written agreement with the employer for the salary sacrifice in exchange for the “1,000 voucher. Instead, they reasonably
excepted for these conditions to apply. In these circumstances, it is reasonable that the voucher issue is treated as a salary sacrifice rather than a tax-free small benefit exemption.
b. Employee joined the company at an agreed salary of “50,000. Employee’s salary was not subject to any reductions, and no formal or informal salary sacrifice agreement was in place. The company would gift their employees Christmas vouchers of circa “1,000. However, this was not a condition in the contract and has never been promised to an employee as part of their remuneration package. Employer made it clear that the issue of gift voucher was discretionary and is not guaranteed. Therefore, a simple fact of gift vouchers previously being gifted to the employee at an employer’s free will and under no obligation does not give a rise to a salary sacrifice arrangement being in place.
For further information please contact Michael O’Leary, Tax Partner, PKF Brenson Lawlor, +353 87 8273317, michael@pkfbl.ie or visit www.pkfbrensonlawlor.ie.
