Staff discounts – are they a taxable discount?
You run a business employing 20 staff and offer them a 50% discount for items they buy for themselves and their families. Nicola Roby, Director, explains whether you must report this as a benefit in kind and if so how it is calculated.
Perks can often play an important part of an employee’s pay package and when they are tax efficient, great. It’s important for employers and employees to understand the tax and NI consequences of handing them out.
Certain benefits such as company cars use special rules to value the amount liable to tax otherwise the so-called residual charge applies.
What is the residual charge?
In essence, the residual charge is what the benefit cost the employer to provide. This isn’t necessarily simple to work out and HMRC got itself in a muddle some years ago when it concluded that for in-house benefits, the cost, and therefore taxable amount, was equal to what the business charged to its customers. The House of Lords put HMRC right and set the standard which has remained undisputed ever since. The case involved a private school which gave its teachers a discount if their children were pupils.
The cost of providing education for one child was almost impossible to work out, but this didn’t alter how the residual charge was arrived at. The Court’s decision was that it cost the school nothing to provide the basic education and therefore it was only the 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.
If the amount of discount is less than the amount paid for the goods or services in total there’s no taxable benefit
How do discounts work in practice?
A taxable benefit can be sometimes be easy to work out. For example, if you’re an employer who gives staff a 25% discount on all goods and your mark-up is always 75%, you can be confident there’s no taxable benefit. But, your costing process for a job should allow you to establish if a discount results in a taxable benefit.
Where the discounted price to your employee covers your costs in providing the benefit in kind, no tax or NI charge will apply. In calculating your costs you can ignore overheads and general expenses which are directly related to the discounted goods or services.