What tax liabilities arise on the provision of computers for the use of employees?

A tax exemption covering the provision of computers and related equipment was introduced in April 1999 to encourage employers to provide computers for their employees in order to improve computer literacy. The exemption applied even if the equipment had no business use at all but it was limited to the first £500 of taxable value in a year. There was a corresponding exemption for Class 1A NICs. The exemption was withdrawn from 6 April 2006 but still applies to computers that were made available

before 6 April 2006, or
on or after 6 April 2006 but on terms that had been agreed and put in writing before 6 April 2006,

as long as it is not replaced or upgraded, unless replaced or upgraded under the terms of a warranty that was in place before 6 April 2006.

The withdrawal of the exemption does not necessarily mean that, if an employee is able to make private use of a computer belonging to the employer, there is a taxable benefit. There is still a relevant exemption, with broader application than just to computer equipment. However, use of the exemption depends on the employer and employee meeting a number of conditions.

Accommodation, supplies and services used in the employment duties

The "accommodation, supplies and services" exemption, defined in section 316 of ITEPA, applies to workplace facilities such as

ordinary office or workshop accommodation (but not living accommodation)
office furniture and equipment such as desks, workbenches, tools and equipment, telephones etc
typists and messengers
stationery and normal office or workshop materials and supplies.

This article explains the application of the exemption to computers and computer equipment, but it applies equally to these other workplace facilities.

The exemption draws a distinction between the provision of computers and computer equipment

in the workplace, i.e. on the employer's premises, and
away from the workplace, e.g. in the employee's home, on other premises or while the employee is travelling.

In the workplace

Where computers and related equipment are provided in the workplace, the only condition for tax exemption is that any use for "private purposes" by the employee, or by members of the employee's family or household, is "not significant".

This exemption recognises the reality of employees making some private use of the employer's equipment in the workplace, e.g. playing computer games, typing a personal letter, using a word processing application, sending and receiving personal e-mails.

The term "not significant" is not defined in the legislation. There is no requirement for employers to log private use in order for the exemption to be satisfied. Rather, HMRC expects that

the employer's policy about private use is clearly stated to employees and defines the circumstances in which occasional private use may be made,
any policy of the employer not to recover the costs of such private use is a commercial decision because the administrative costs of doing so would exceed the amounts involved, rather than a desire to reward the employee, and
there are reasonable checks to ensure that the policy is actually followed in practice.

Therefore, in order to avoid a potential tax charge, the employer should have a written policy on the private use of computers in the workplace. The policy should be issued to all employees with access to a computer and compliance should be monitored to a reasonable degree.

Away from the workplace

Where computers and related equipment are provided away from the workplace, the conditions for exemption are that

any use for "private purposes" by the employee, or by members of the employee's family or household, is "not significant" (as considered above),
the sole purpose of providing the benefit is to enable the employee to perform the duties of the employment, and
what is provided is not an "excluded benefit".

The first condition is the same as for computers provided in the workplace. However, HMRC's guidance points out that "not significant" should not necessarily be assessed in terms of the time spent in business and private use. Rather, it should be considered in the context of the employee's duties and the need for a computer in order to carry out those duties. If, for example, a home-based employee cannot perform the duties of the job without a computer, any private use of the computer is still likely to be "not significant" when compared with the business need, even if it is used privately for longer periods of time than for business.

Note the following example, taken from HMRC's Employment Income Manual:

An engineer for a large utility company is provided with a computer for use at home by their employer. The list of jobs for each working day is sent overnight via an email from the employer. The engineer is required to log on first thing every morning to download the details of the work for the day. This may take no more than five minutes. The computer is often used to order online weekly groceries and to scan Ebay for bargain purchases. Private use may be for an hour or more each day.

The employer's sole purpose in providing the computer was to enable the engineer to download the work roster for each day. His use of the computer for this purpose is an essential duty of the employment - it is the sole reason that the employer provided the computer and it is the primary reason for the employee to have the computer available at home. Private use of the computer is secondary to the use for work purposes, even if the actual amount of time spent on private use exceeds that on business use. Consequently in this example private use is not significant and the exemption in s316 applies.

The second condition means that

the computer must not be provided partly so that the employee can use it privately, and
there must be no element of reward in the provision.

The third condition excludes such facilities as motor vehicles, boats, aircraft and business improvements to living accommodation.

While this exemption may not be difficult to meet in the case of computer equipment provided for employees while away from work and home on business, there is a compliance problem if the equipment can be used at home, or if it is installed at home, particularly if it can be used by family members. In particular, to avoid a tax charge,

employees must be given a written policy and must understand the "not significant" conditions, and
the computer and related equipment must have been provided specifically for business purposes.

If the employer, while accepting and managing the likelihood that a computer will have some "insignificant use" at the employee's home, provides it in order for the employee to use it privately, even to a limited extent, the exemption is not met and a full tax charge arises.

Distinguishing between computers and telephones

The statutory exemption for mobile phones (section 319 of ITEPA) allows an employee to be provided with the use of a mobile phone without any tax charge, even if it is used largely or wholly for private calls. Some telephones have computer capabilities; some computers have telephone capabilities. The kinds of equipment in question here are the "smartphone" - a mobile phone with computer facilities - and the PDA (Personal Digital Assistant) - a computer with telephone facilities. Where is the line drawn between a smartphone that is fully exempt because it is a mobile phone and a PDA that may or may not be taxable according to the extent of its private use?

HMRC's current guidance is to be found in the Employment Income Manual, in the section that describes the computer exemption that has been withdrawn. (See http://www.hmrc.gov.uk/manuals/eimanual/eim21701.htm). HMRC's view, based on its own interpretation of the legislation, is that most modern PDAs and smartphones have "facilities more typically associated with a computer" and, as a result, the mobile phone exemption does not apply. Whether or not their provision is taxable depends on whether the conditions described above for computers are satisfied.

HMRC's interpretation of what is or is not a mobile phone or a computer has not yet been tested in court. Employers that decide not to report a smartphone (e.g. an Apple iPhone or RIM Blackberry) because they believe it qualifies under the mobile phone exemption must be prepared to justify that decision. A possible advantage lies in the fact that "computer" is not defined in legislation and is no longer singled out by a specific exemption, but "mobile telephone" is defined. There is nothing in the mobile phone exemption that states that it is no longer a mobile phone if it also has computer facilities.

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