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In the 2006 Budget, the Chancellor announced that the limited statutory exemption for the provision of computers for the use of employees was to be withdrawn from 6 April 2006. The tax exemption, as set out in section 320 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA), applied to computers and related equipment, even if they had no business use at all, but was limited to the first £;500 of taxable value in a year. It was introduced in April 1999 to encourage employers to provide computers for their employees in order to improve computer literacy. There was a corresponding exemption for Class 1A NICs.
The opportunity of using the tax and NICs exemptions in conjunction with salary sacrifice schemes led to the increasing popularity of "Home Computing Initiative" schemes, under which employers could loan computers at little or no cost over the period that they were on loan to the employees.
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 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.
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 kind of equipment in question here is the PDA (Personal Digital Assistant). Where is the line drawn between a PDA that is fully exempt because it is a mobile phone and another 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). A PDA which has mobile phone functionality, albeit with email and Internet connections (such as the Blackberry), would not be viewed by HMRC as a computer but would qualify for the tax exemption available for mobile phones. However, a PDA with facilities that are generally associated with computers, even though it may be capable of making phone calls, would be viewed as a computer and its tax status, as a result, would depend principally on its level of private use.
Until HMRC provides more specific guidance, it would be sensible for employers, if they decide not to report a PDA because they believe it qualifies under the mobile phone exemption, to be prepared to justify that decision. Who makes the particular equipment and how it is advertised may be significant factors. In general, the manufacturers of mobile phones, such as Nokia, Motorola, Samsung, Sony Ericsson and Panasonic, do not sell computers or promote their products as computers. Similarly, the main manufacturers of PDAs, such as Acer, HP, Fujitsu Siemens, I-Mate and Palm One, do not generally sell mobile phones or promote their products as mobile phones.
There are, however, a number of crossover products, such as the HP Ipaq Mobile Messenger, I-Mate Smartphones and Palm One Trio (PDAs with telephone facilities) and the Nokia Communicator and Motorola MPx220 (mobile phones with office facilities). A distinction here may be whether the equipment's operating system is designed principally to manage phone, email and Internet services, such as the Symbian operating system, or to manage typical PC and office applications, such as Windows Mobile or Palm Garnet.
Later Payroll Tips will consider
- the application of the workplace exemption to telephone lines and Internet use, and
- the way in which computers are taxed if the workplace exemption is not met.
...back to 25 May 2006
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