Who pays the tax on staff discounts?

December 2nd 2020

Some firms are offering staff discounts to help keep the business ticking over and the cash flowing. If you decide to do the same, what are the tax implications?

Money off
Perks are often used as a way to keep staff happy when you are struggling to offer a pay rise. However, offering them a discount for the services or products you provide can help you too.

But what are the tax implications for you? In determining whether a taxable benefit arises, you’ll need to compare the cost to you of providing the goods/services with the amount that the employee pays.

Residual charge
Some benefits use special rules to value the amount liable to tax and NI, e.g. company cars, otherwise the so-called “residual charge” applies. In essence, this is how much the benefit costs you to provide. This isn’t necessarily simple to work out and the House of Lords set the standard which has remained undisputed ever since. The case (Pepper v Hart 1992) involved a private school which gave its teachers a discount if their children were pupils.

Marginal cost
The Lords’ decision was that it cost the school nothing to provide the basic education and therefore it was only the extra or “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.

In simple terms if the amount of discount is less than the amount paid for the goods or services in total there’s no taxable benefit.

Your costing process for a job should allow you to establish if a discount results in a taxable benefit. However, in other cases it is even easier to work out. For example, if you’re a retailer who gives staff a 25% discount on all goods and your mark-up is always 75%, you can be sure there’s no taxable benefit.

Please note
Include any costs you incur which are specific to the job, e.g. delivery charges for parts. However, you can ignore them if the parts arrive as part of a general delivery charge.

If you pay less than the marginal cost, a taxable benefit arises which must be reported. Then there’s income tax and employers’ NI to pay.

If the discounted price of goods or services is at least equal to the cost of providing them, no taxable benefit arises. To avoid staff discounts becoming taxable benefits, work out the marginal costs before deciding on the rate or amount of discount.

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