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ALMOST EVERYONE SENDS private e-mails on work computers. Some go further and purchase goods or download videos, while the most daring watch the World Cup and date on Internet chatrooms. But until recently, no-one worried that this behaviour could trigger a liability to income tax, NICs and VAT.
Of course, private use of workplace assets has long been subject to tax (and therefore NICs) under the use of assets legislation; there are also special VAT rules for business assets where there is some private use. But these rules were not applied to business computers used privately because there was an explicit direct tax exemption, and a correspondingly benign VAT treatment.
However, the tax exemption for home computers previously contained within ITEPA 2003, s 320 was removed by FA 2006, s 61; simultaneously the VAT statement on private use disappeared from the DTI website. Defending the abolition, Hansard (2 May 2006) records that Dawn Primarolo said:
'I have asked HMRC to work with [the] representative bodies to ensure that clear practical guidance is produced, to help keep employers' compliance costs to a minimum.'
HMRC have been roundly criticised recently for their failure to consult on a range of tax changes, from trusts to filing dates. But on this issue they deserve praise: they have consulted on the new guidance and have listened to representations. The result has now been published as part of HMRC's Employment Income Manual.
This article reviews that guidance and its implications for employers and employees. It looks both at the private use of work computers, and the transitional provisions relating to computers provided under the s 320 exemption.
Legislative background
ITEPA 2003, Part 3 Chapter 10 sets out the rules for the taxation of assets supplied to an employee for his or her personal use, 'without any transfer of the property in the asset'. Under these rules (ITEPA 2003, s 205) the employee is regarded as receiving a taxable benefit, valued at the higher of:
1. the annual value of the use of the asset, calculated at 20% of the asset's market value when first provided to the employee; and
2. the annual hire charge paid by the employer, plus any related additional expenses.
In line with the general rule for employee benefits, the amount is also subject to Class 1A National Insurance contributions. So far, so straightforward.
However, where there is part-private, part-business use of an asset, complications emerge. First, the whole of the value must be included on the P11D; the employee must then claim a deduction for the business use of the asset under ITEPA 2003, s 336. This is bureaucratic and burdensome for employers, employees and HMRC.
Secondly, the employer cannot claim a reduction of the Class 1A contribution to take account of the business use. This is because there is no apportionment for mixed use assets in the NIC legislation, see SSCBA, s 10(7A).
Given that all employees use their work computers privately, how is this problem to be surmounted? The answer lies in the magic words 'not significant'.
Not significant
ITEPA 2003, s 316 gives an exemption from the charging provisions of Part 3, Chapter 10 if the use of the asset is 'not significant'. HMRC's new guidance (in the Employment Income Manual at EIM21613) says that:
'The “not significant” condition should not be decided purely on the absolute time spent on different uses of the equipment or services provided. It should be considered in the context of the employee's duties and the necessity for the employee to have the equipment or services provided in order to carry out the duties of the employment. For example, 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. In these circumstances section 316 will apply and no tax charge will arise.'
The HMRC guidance also gives a number of very useful worked examples which illustrate this point, and the most interesting of these are set out as Examples 1 to 3 below.
Example 1: Utility engineer
An engineer for a large utility company is provided with a computer for use at home by his employer. The list of jobs for each working day is sent overnight via an e-mail 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 E-bay 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 s 316 applies.
Example 2: Management consultant
A management consultant working for a consultancy firm works largely from home. She spends a high proportion of her time visiting customers, and occasionally attends a meeting at the employer's offices.
The employer provides her with a laptop computer for business use because on the days when she works away from the office, access to a computer is still absolutely essential to her job. Occasionally she uses the laptop for private purposes and she has two children who are allowed to use the laptop for accessing the Internet to help with their school homework and for playing computer games and downloading music.
The amount of time that the laptop is used by the consultant for business use during the day is probably about the same as that spent on it in the evening and at weekends by her children. But the sole reason that she has been provided with the laptop is for business use, for which purpose it is essential, and its primary purpose is for the business use. The private use is secondary to this and is therefore not significant, regardless of the amount of time spent on private use. The exemption in s 316 applies.
Example 3: Financial adviser
An employee for a financial advisory firm chooses to work at home every Friday. The employer provides a laptop computer for the employee to take home. It is not an essential part of his job to work from home on Fridays, but since the employer agrees to this working pattern, the laptop is required to enable the employee to do his job. The amount of time spent on the laptop for business use on Fridays is roughly equal to time spent at other times of the week on personal use of the laptop.
The sole reason that the laptop is provided is to enable the employee to work from home on Fridays. It is essential for this purpose. Private use of the laptop is secondary to this primary purpose and is therefore not significant.
The exemption in s 316 applies.
Documented policy
For the 'not significant' test to be met, the Employment Income Manual at EIM21613 says that, although employers are not expected to keep detailed records of private use, the following requirements must be satisfied:
- the employer's policy about private use must be clearly stated to the employees;
- it must set out the circumstances in which private use may be made; and
- any decision of the employer not to recover the costs of private use must be a commercial decision, for example based on the impractical nature of doing so, rather than a desire to reward the employee.
Small businesses, in particular, should take note of the requirement to have a documented policy on private use if they are to seek the protection of the 'not significant' exemption. HMRC say that:
'this may include making the conditions clear in employment contracts or asking employees to sign a statement acknowledging company policy on what use is allowed and any disciplinary consequences if this policy is not followed.'
Is this guidance enough?
Mike Truman, in 'Laptop Liability?' (Taxation, 11 May 2006, page 162) said that if HMRC published a statement along these lines, then this 'is not an interpretation, because HMRC know the law doesn't say that. It's a concession. And that leads us smack into the brick wall that is the case of CIR v Wilkinson [2005] UKHL 30'.
He rightly points out that if there is a borderline case, where HMRC argue that the computer was not provided for work reasons and the employer/employee disagree, then this HMRC guidance cannot be relied upon in court.
I agree. Of course, the issue of whether or not taxpayers can rely on HMRC guidance affects all of tax, and not only the computer exemption. I believe it should be discussed as a priority between the professions, Government and HMRC. However, in the meantime, we have a workable definition of 'not significant' which will be most welcome to employers and employees.
Use of broadband
The 'not significant' definition also applies in the same way to broadband. HMRC (at EIM21167) say:
'Where an employer provides for Internet access at the employee's home solely for work purposes, under a package where there is no separate billing or record of access calls, and no breakdown is possible between work and private calls, we accept that where private use is not significant (and private use does not affect the cost of the package) the costs of connection are exempt from tax under s 316.'
However, care is needed. If the employee contracts for the broadband and the employer reimburses the cost, then this is likely to be taxable in full on the employee as a benefit. This is because the reimbursement does not technically fall within ITEPA 2003, s 316, but under the 'wholly, exclusively and necessarily incurred in the performance of the duties' requirement of s 336.
As HMRC point out:
'Where an Internet package, such as for broadband access, provides unlimited access and no separate billing procedures to separate business use from private use, it is not possible for an employee to identify the business part of the cost ... If there is no identifiable cost that is wholly and exclusively for business use, no deduction will be due.'
VAT
VAT legislation requires an adjustment to be made if goods are used partly for business and partly for non-business purposes.
In booklet 700, HMRC say: 'You may choose to ... only count as input tax the tax relating to business use. If you wish, however, you may treat all the tax incurred as input tax and then account for output tax in each accounting period on the private or non-business use. If you choose to recover full input tax, you will need to keep records to show how the asset has been used.'
However, the DTI, which led the home computing initiative (HCI), stated that, providing there was an intention that some business use of the home computer would occur, then no apportionment would be required and all the input tax would be deductible. Furthermore, 'if the equipment is loaned to the employee for no charge or for a salary sacrifice then no output tax is due'. As a result, the input tax could all be recovered and there was no output tax. In consequence, there was no need to keep records to monitor employee usage. The booklet containing this advice was, however, withdrawn from their site (along with other HCI material) after the scheme was abolished.
When considering the private use of work computers, it is self-evident that there will be business use, and thus the same approach should apply. If HMRC does not maintain this position, then businesses will need to monitor private use for VAT purposes. This will undermine the reduction in red tape which has been achieved on the direct tax side.
However, we have not yet been informed of the HMRC decision. This is disappointing, because private use is actually a more immediate problem for VAT than for direct taxes. The vast majority of businesses will already have made at least one VAT payment since 6 April 2006 — without realising that they may have made a VAT error.
Transitional reliefs
FA 2006, s 61(3) provides that a transitional relief for computer equipment which was 'first made available ... before 6 April 2006'.
At EIM21699, HMRC confirmed that the scope of these rules will be regarded as covering the following.
- Arrangements entered into shortly after 6 April 2006 under which an employer was committed to provide a computer to the employee, but where — for reasons beyond their control — the employee could not take physical possession of the computer until on or soon after 6 April.
- Computers replaced under warranty as long as the replacement computer is in all relevant respects the same as the original. Helpfully, HMRC have also recognised that, because of the fast pace of change in computer technology, it is unlikely that a replacement computer provided one year into a three year arrangement will be precisely the same as the original. They have expanded this by stating that 'as long as any upgrade is provided on a like for like basis at the behest of the supplier, or under a warranty arrangement (e.g. the supplier sees a replacement as the cheapest way of meeting an obligation to repair the computer within a warranty period) and not at the request of the employee, for the purpose of the exemption the replacement computer may be treated in the same way as the original computer'.
- Software renewals provided as part of an arrangement entered into before 6 April 2006. HMRC say that 'it is almost inevitable that the software provided year on year will include an element of improvement or upgrade relative to the previous year. If the upgrade represents the standard software upgrade of the same software which was provided as part of the original agreement, and not at the employee's request, it will continue to be covered by the exemption. For example, if the agreement is to supply a computer with Word or PowerPoint, accepting the 2007 updated versions on a computer supplied under an agreement entered into before 6 April 2006, does not constitute a benefit'.
Conclusion
Providing HMRC agree to maintain the practical approach for VAT which they applied to the HCI scheme, this new guidance means that most businesses and their employees will now be able to avoid the bureaucratic burden of identifying the private use of work computers.
Anne Redston CTA (Fellow), FCA is Chair of Personal Taxes at the Chartered Institute of Taxation and a Visiting Professor in Law at King's College London. The views expressed in this article are her own. Anne can be reached via aredston@ciot.org.uk.
