Taxation on discounts provided to employees

Many employers offer discounts on their goods or services to staff members as part of their employment benefit package. However, offering this benefit can have adverse tax implications if the rate of the discount is not carefully considered.

Whether a taxable benefit on a discount arises, depends on the expense incurred by the employer in providing the goods or services the employee has purchased. If the discount brings the price paid by the employee below the cost the goods or services would be to provide, a taxable benefit under the benefits code will arise. The benefit is the cost to the employer in providing the goods or services less any amount paid by the individual (s203(2) ITEPA 2003).

The cost to the employer of providing the goods or services includes the cost of the production or acquisition of the goods or services together with a proportion of any overhead expenses directly related to that production or acquisition. The cost also includes taxes or duties paid in respect of the goods or services by the employer.

If a taxable benefit arises, the benefit will be treated as earnings in the tax year in which the discounted goods or services are provided. Since this is a benefit in kind rather than a cash payment, the employer is not obliged to operate PAYE. The benefit is subject to income tax and also class 1A national insurance contributions (NICs) which are reported by the employer on form P11D due each year by 6 July following the tax year in question.

Even if there is no charge under the benefits code, a charge may arise under s 62 ITEPA if the “second hand value” of the goods the employee buys exceed the price they pay. The second-hand value is the amount the employee could get for the item if they immediately disposed of it as soon as it came into their possession. In this case the tax charge arises on the second-hand value of the goods less any amount paid by the employee for the goods. As above, the benefit is not subject to PAYE but is subject to income tax and class 1A NICS and is reportable by the employer on form P11D.

On a practical level, to reduce the administrative burden of assessing each discounted purchase an employee makes, the employing company may want to ensure that the price paid by the employee after the discount offered remains well above the cost to the employer and the second-hand value of any goods so that there will be no tax charge triggered. If this approach is taken, it is recommended that a regular review of the relevant costs and extent of the discount are undertaken to ensure that this remains the case.