Employer FAQ - Taxation of Computers

How is the taxable value of a computer provided for an employee's use calculated and reported?

There are two statutory tax exemptions that may, if the conditions are satisfied, apply to the provision of a computer for the use an employee. The exemptions, as set out in the Income Tax (Earnings and Pensions) Act 2003, are

the "workplace" exemption, in section 316, and

the "work-related training" exemption, in sections 250 to 254.

The "workplace" exemption

This exemption applies broadly to "accommodation, supplies and services" provided by an employer for the use of employees, including computers and related computer equipment. Where computer equipment is provided for use away from the employer's premises, the exemption only applies if the sole purpose in providing it is to perform the duties of the employment. There may not, therefore, be any element of reward in the provision. However, the exemption acknowledges that there will inevitably be some private use made of computer equipment and the exemption is not lost as long as any private use by the employee, or by members of the employee's family or household, is "not significant".

The term "not significant" is not defined in the legislation. Employers are not required to log private use in order for the exemption to be satisfied. Rather, HMRC suggests that the employer should be able to demonstrate that

a policy not to recover the costs of any private use from the employee is a commercial decision on the basis that the administrative costs would be out of proportion to the amounts recovered, and

the policy on private use has been made clear to employees.

As a result, if the terms on which the computer equipment is provided state that the employee is permitted to use the equipment privately, there will be a tax charge. If the terms state that private use is not permitted and that any private use that is made of it is subject to the employer's internal arrangements to monitor, control and minimise the cost of any private use, a tax charge does not arise.

However, whether private use is or is not significant should not be an absolute measure of the length of time an asset is used for business and private purposes. Rather, it should be considered in the context of the employment duties and the need for the employee to have the equipment to do the job. In fact, private use could exceed business use without compromising the exemption.

HMRC's guidance states: "Where a computer is provided by an employer because it is necessary for an employee to be able to carry out the duties of the employment either at home, or whilst travelling or at work, it is highly unlikely that any private use made of that equipment will be significant when compared with the business need for providing the computer in the first place."

The "work-related training" exemption

The costs incurred by employers in providing training for employees is not a taxable benefit if it is "work-related". The definition of "work-related" is very broad and covers almost any kind of training that is likely to help the employee in the current job or in any likely future job with the employer.

If the employer identifies a training course that is provided by means of "e-learning", it may be necessary to provide a computer so that the employee can study at home. The computer equipment is also exempt from a tax charge if it is a "training-related asset". To qualify for the exemption, the computer must be provided for use only

in the course of training, or

in the course of training and in performance of the employment duties.

Consequently, if the computer has any private use, the exemption is lost. There is no "insignificant" concession as there is with the "workplace" exemption.

HMRC guidance specifically states that the exemption applies to "a computer used during the training period, which is not used for personal purposes". However, it would be very difficult for an employer to demonstrate that a computer provided for such training purposes was never used privately. In practice, both employer and employee are likely to accept that the computer will have private use and, as a result, is liable for a tax charge.

Reporting the benefit

If one or other of the exemptions does not apply, the cash equivalent of the computer equipment is reported in Section L Assets placed at the employee's disposal, on form P11D. There is no equivalent reporting requirement for lower-paid employees (i.e. those with an annual earnings rate of less than £8,500) on form P9D.

The cash equivalent is the "cost of the benefit", less any part of that cost made good by the employee. The "cost of the benefit" is the higher of

the "annual value of the use of the asset", and

the annual amount paid by way of rent or hire charge for the asset,
plus the amount of any "additional expense".

If the employer has bought the computer equipment, the "annual value of the use" of the computer equipment is 20% of its "market value" when it was first provided as a benefit. In general, the market value in this context is what the employer originally paid for it.

Example: The reportable value of a computer with an initial market value of £500 is £100 for each whole tax year that it is made available (plus any additional expenses incurred).

If, on the other hand, the employer leases the computer equipment, the reportable value is the rental or hire cost incurred by the employer.

Example: The reportable value of a computer with a lease cost of £250 per annum is £250 for each whole tax year that it is made available (plus any additional expenses incurred).

Any "additional expense" covers, for example, the costs of enhancements, repairs and maintenance contracts. However, it is limited to the additional costs that the employer has incurred only because of providing it for the employee, i.e. the expense that would have been saved if the employer had not provided the benefit.

The employer may apportion the cash equivalent in a "fair and reasonable" manner if the computer and other equipment

is shared between two or more employees

is shared between a number of employees and lower-paid employees

is also used by the employer

is also hired out to third parties

is provided only for part of a tax year.

Example: A computer with an annual reportable value of £100 is first made available on 1 January. The employer reports a value for the part tax year of £26, i.e. £100 ÷ 365 × 95.

However, apportionment is not permitted in respect of the mix of private and business use made by the employee. The employer may not report a lower value by estimating the proportion of business and private use of the computer equipment. The full cash equivalent must be reported, even if no private use is ever made of it. It is up to the employee to claim tax relief on the grounds that a proportion of the asset's use was "incurred wholly, exclusively and necessarily in the performance of the duties of the employment". The employer must also pay Class 1A NICs on the total amount reported, unless the employer knows that the equipment has had no private use at all and the employee can successfully claim full tax relief.

Example: An employer provides a computer with a reportable value of £100 for a full tax year. The employer anticipates that the employee's use in the tax year is 20% business and 80% private. Nevertheless, the employer must report £100 on form P11D and pay Class 1A NICs on the full £100. The employee may independently claim tax relief by demonstrating the actual proportion of business use to HMRC's satisfaction.

...UK Payroll News - Latest

Workplace exemption
Work-related training
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Apportionment
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