A company created two employee benefit trusts for its employees.
After the sale of the parent company for £39 million, cash payments were made to certain employees by the trustees at the end of October 2002, October 2003 and February 2004. These payments were based on the company’s bonus structure and length of service.
HMRC decided that the company should pay primary and secondary class 1 National Insurance contributions on the payments made to the employees. The company appealed this ruling and claimed that the payments were gratuities and should be exempt from National Insurance under Social Security (Contributions) Regulations 2001 Sch 3 para 5.
The First-tier tribunal stated that a gratuity in this situation was a payment given voluntarily in recognition of services rendered and the amount given depended on the donor.
The payments made to the employees were considered individually in order to see if they satisfied the gratuity test.
The company’s appeal was allowed as a result of the payments being gratuities as the trustees were not obliged to make the payments and the amount was at their discretion.

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