Your client is a retailer that wants to offer a discount to employees and their family members. They are asking whether this will be a taxable benefit in kind. What advice can you give to ensure there is no tax charge to spoil this generosity?

Tax-efficient perks

Perks can play an important part of an employee’s pay package and they can also be very tax efficient for your clients. It’s therefore important that they understand the tax and NI consequences of giving them for your client’s business as well as for their employees. You will be aware that some benefits have particular rules to value the amount liable to tax and NI, e.g. company cars, otherwise the residual “sweep-up” charge applies.

Residual charge method

The residual charge simply values the benefit at the amount it costs your client to provide it. This might not always be obvious. HMRC has previously tried to argue that the cost of in-house benefits, such as free services, should be the amount that a business would charge to its customers, e.g. on an average cost basis.

The House of Lords later corrected this position in Pepper v Hart [1992] UKHL 3 (see Follow up ), a case involving the cost of a private school allowing teachers to enjoy discounted fees if their children enrolled as pupils. This will therefore be relevant if your clients are offering their employees a staff discount on goods or services.

Marginal cost

The House of Lords decision established the current position which has not been challenged since. The cost of providing education to a single child was impossible to quantify precisely. However, that did not alter the way that the residual charge had to be calculated. It was held that it cost the school nothing additional 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 provided by your clients.

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 at £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.

Pro advice. Put simply, if the amount of the discount your client gives is less than the amount paid for the goods or services, there is no taxable benefit.

Advising your client

Sometimes the cost of providing a benefit will be easy to work out. For example, if a retailer has a mark-up of 75%, and offers a staff discount of 25% there will never be a taxable benefit. Other situations might require you and your client to undertake a costing exercise. Remember to ignore general overheads and anything else not specific to the job.

Pro advice. To avoid problems, ensure clients do the costing exercise before offering the discount.

There will be no benefit in kind as long as the price paid by the employee covers the marginal costs specific to providing the goods, i.e. the purchase price. For more complex situations involving services, advise clients to undertake a costing exercise before offering a discount to ensure no charge arises.

Follow up

Pepper v Hart [1992] UKHL 3