A business provides their staff with workplace clothing but because of a recent change to the rules, they might face a tax and NI bill. What are HMRC referring to and is there any way to avoid these tax costs? Helen Johnstone finds out.
ABC Limited provides all staff who might come into contact with customers with similar outfits for use while they are at work. This is a fairly new development for the firm and as such the arrangement is not part of the employees’ contracts. The cost is a tax-deductible expense for ABC Limited but HMRC suggest that the clothing is a benefit in kind for the employees which would result in a tax bill for them and a Class 1A NI bill for the business. While there’s more than one exemption which could prevent these charges, HMRC says none of them apply.
Trivial items – a new interpretation
Because the cost of each item of clothing is less than £50, ABC Limited thought that the trivial benefits exemption applied. The rules say that benefits costing an employer no more than £50 are tax and NI free and can be made as many times per year as you wish. The trouble is there are further conditions which HMRC reinterpreted more strictly at the end of 2019.
It now says that the exemption won’t apply to an arrangement where an employee has a “legitimate expectation” of receiving a benefit in kind. The expectation means the benefit is a contractual right, and the rules specifically preclude contractually provided benefits.
Exemption specifically for clothing
While ABC Limited didn’t consider it, because they thought the trivial benefits exemption applied, an employer can provide staff with clothing which is protective or a uniform. Clothing is protective if it’s “worn as a matter of physical necessity because of the nature of the job” e.g. overalls, protective gloves, etc.
Is similar clothing a uniform?
Determining what clothing constitutes a uniform can be tricky. HMRC says a uniform is clothing that can “readily be recognised” as such “by the person in the street”. Requiring employees to follow a dress code, such as dark trousers and a sweatshirt, isn’t enough, it must obviously be a uniform. The clothes ABC Limited provided were always similar and sometimes identical to each other but would not automatically be seen as a uniform by an outsider.
Avoiding the tax and NI bill
It is possible to turn otherwise day-to-day clothing into uniforms and so avoid tax and NI bills.
HMRC accepts that the inclusion of a firm’s logo or name, if obvious and recognisable as relating to your business, can turn ordinary clothing into a uniform. However, the logo must be permanent.
There are also negative VAT consequences for providing your staff with clothing, although these too can be avoided.
In the example above, HMRC is correct, even where each item of clothing costs less than £50 it counts as a contractual right and so isn’t exempt as a trivial benefit.
To avoid tax and NI in future, the business could permanently add the firm’s logo or name conspicuously to each item of clothing. That way it counts as a uniform and is subject to a special exemption.