Suggestion schemes

By Tolley in association with Paul Tew

The following Employment Tax guidance note by Tolley in association with Paul Tew provides comprehensive and up to date tax information covering:

Suggestion schemes
What constitutes a tax exempt suggestion scheme?
Calculating the maximum ‘financial benefit’ award
Making an encouragement award
What are the reporting requirements to HMRC?
NIC
PAYE
PAYE settlement agreement (PSA)
P11Ds
Minimum wage

An employee may be encouraged to share ideas with their employer that might benefit the business. These ideas may be posted in a staff suggestion box, posted on the company intranet or any other suitable method of delivery as agreed with the employer. Any payment made by an employer in recognition of the employee’s idea would ordinarily be taxable. However, a specific tax exemption exists for suggestion awards, subject to certain conditions.

What constitutes a tax exempt suggestion scheme?

Awards made by an employer to an employee, exempt from income tax, provided that all the following conditions are met:

•the employer formally adopts a suggestion scheme that is open to all employees in general on equal terms or to a particular group of them. A scheme which is open to all the employees in a particular workplace or geographical area satisfies this condition
•the suggestion relates to the activities carried on by the employer
•the employee could not reasonably have been expected to put forward the suggestion in the course of their employment duties, taking account of their experience in the employment and their job description
•the suggestion must not be put forward at a meeting held for the purpose of hearing employee suggestions

ITEPA 2003, s 321

The suggestion must be outside the scope of an employee’s normal duties. Many employee suggestions are made as a result of an employee coming up with an idea about something they know about as a result of their job.

See Example 1.

The legislation splits the awards into two separate definitions: a ‘financial benefit’ and an ‘encouragement award’. A ‘financial benefit’ award is an award for a suggestion relating to an improvement in efficiency or effectiveness which the employer