VAT Incurred on the Provision of Home Computers - HMRC changes its VAT recovery policy

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In a new Revenue and Customs Brief, HMRC has explained a significant change of policy with regard to the supply of computers to employees for their use away from the workplace.

From April 1999, a tax exemption allowed employers to loan computers to their employees without a tax charge. In January 2005, the Home Computer Initiative (HCI) was launched with the objective of encouraging the use of the exemption. Under normal circumstances, any private use by employees would restrict the rate at which VAT could be recovered. However, at the time, HMRC considered that the VAT treatment should mirror the approach taken for income tax. Consequently, as long as there was some business use, any VAT incurred could be deducted in full without any adjustment for private use.

The tax exemption on which HCI was based was withdrawn from 6 April 2006, although employees already in the scheme continue to benefit until the contract period, usually three years, comes to an end. HMRC has now announced that the VAT concession is also being withdrawn, with effect from 14 August 2007.

The policy now is that businesses may only claim full VAT recovery where the provision of a computer is necessary for an employee to carry out the duties of the employment. In these circumstances, HMRC's view is that it is unlikely that any private use will be significant when compared with the business need for providing the computer in the first place. The rule for VAT, therefore, mirrors HMRC's interpretation of the income tax exemption for the provision of assets away from the workplace.

However, if it cannot be demonstrated that it is necessary to provide an employee with a computer in order to carry out the duties of the employment, only a portion of the VAT incurred is recoverable as input tax. HMRC accepts any method of apportioning the VAT incurred as long as the result fairly and reasonably reflects the extent of business use. To limit administrative burdens, employers may be able to agree a set percentage with HMRC based on a representative period.

Where the former exemption continues to apply to computers loaned before 6 April 2006, full VAT recovery also continues.

The facility to apportion VAT recovery according to the extent of business and private use only applies where the employer is the recipient of the supply of the computer and, as a result, the computer loaned to the employee is an asset of the business. If the computer is supplied direct to the employee, the business cannot recover the VAT incurred on the that supply as input tax.

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Further information:
Revenue & Customs Brief 55/07