Home Computers for Employees - Tax Issues.

With computers proving indispensable in the work environment and having become such an integral part of modern life, it is common for employers to provide their employees with computer equipment to use at home where the relevant computer equipment may be used either partly or wholly for non-work purposes. If an employer does provide a computer to an employee for use at home either wholly or partly for non-work purposes (rather than being provided solely for work purposes), how will the employee be taxed?

The tax treatment of an employee will depend on exactly what the employer is providing to the employee. This article looks at two common scenarios:

The employee is provided with computer equipment to use at home without there being any transfer in ownership of the equipment.

The employee is given or sold computer equipment which was previously made available to either that employee or another employee or director as in scenario (1) above.

Before considering the above scenarios, it is worth determining exactly what is meant by "computer equipment." HM Revenue & Customs (HMRC) consider computer equipment to include anything from personal computers (including laptops) to printers, scanners, modems and other peripheral devices "designed to be used by being connected to or inserted into a computer." Software is included where it is made available with the computer, but software on its own is not. Neither digital cameras nor the price of connecting to the internet fall within the definition of "computer equipment". HMRC do not currently consider Personal Digital Assistants (PDAs) such as Blackberries to constitute "computer equipment".

In relation to the first scenario, a partial exemption from tax, known as the "Home Computing Initiative", exists which in many cases will fully exempt the relevant employee from paying tax. Where an employer provides an employee with computer equipment and the value of the benefit to the employee is [pounds sterling]500 or less, there will be no income tax to pay. To the extent that the value exceeds [pounds sterling]500, income tax will be payable on the excess. For these purposes, the value is calculated as being 20% of the market value of the computer equipment being provided, determined at the time when the computer equipment is first provided as a benefit to the relevant employee.

To take an example, if an employer provides an employee with computer equipment worth [pounds sterling]2000, no tax will be payable by the employee because the value of the benefit (20% of [pounds sterling]2000) is less than [pounds sterling]500. Equally, if an employer were to provide an employee with the same computer equipment worth [pounds sterling]2000 and pay for maintenance expenses of [pounds sterling]100 yearly, the employee would not have to pay any tax on the benefit (because the value of the benefit would be [pounds sterling]500). Where the benefit falls within this [pounds sterling]500 limit, the employer does not have to report any benefit on Form P11D.

It may be the case that an employer provides a computer to an employee with the intention that the employee uses the computer for carrying out the duties of his or her employment at home, although the employee is also allowed to use the computer for personal use. Where a tax charge arises because the value of the benefit exceeds [pounds sterling]500, the employee can claim a deduction in respect of the use of the computer in performing his duties. This is illustrated in the example below.

An internet-based journal employs staff who do much of their work from home. They are provided with computer equipment with a market value of [pounds sterling]4500. The employees are allowed to use the equipment for private purposes and one particular employee is able to demonstrate that he uses it 80% of the time for work and only 20% of the time for personal use. The equipment is never used concurrently for work and private purposes.

The annual value of the benefit is [pounds sterling]900 (20% of [pounds sterling]4500). When the [pounds sterling]500 exemption is deducted from the annual value of the benefit, the employee still has an excess of [pounds sterling]400, which is potentially taxable. However, the employee is entitled to a deduction in respect of the use of the computer equipment for work purposes. The amount of that deduction is [pounds sterling]320 (80% of [pounds sterling]400) leaving the employee with a taxable benefit of [pounds sterling]80.

It is worth noting that the partial exemption, illustrated by the examples above, is not available in two circumstances:

where the arrangements for making the computer equipment available are arrangements which are confined to cases of provision to directors or members of their families; or

where any provision to directors or their families is on more favourable terms than any provision to employees who are not directors or their families.

The above restrictions do not, however, require that all employees and directors are provided with identical computer equipment, that all the employees and directors receive equipment of equal value or even that all employees are provided with computer equipment (so long as some employees who are not directors are provided with computers on terms which are no less favourable than the provision to the directors).

In the second scenario, computer equipment which has been used as in scenario (1) is sold or given to an employee. The employee to whom the computer equipment is sold or given may be a different employee from the employee to whom the computer equipment was lent. The partial tax exemption rules do not apply here and tax will be payable on the relevant value of the benefit. This is the market value of the computer equipment at the time at which it is given to the employee (where it is given to the employee) or the market value of the computer equipment at the time at which it is given to the employee less the amount the employee has paid for it (where it is sold to the employee). This is illustrated in the following example:

The employer in the first example above decides to sell the computer he acquired for [pounds sterling]2000 to the same employee to whom he has been lending the computer for the past 4 years. The computer is now worth [pounds sterling]650. The employee pays [pounds sterling]250 for it. Tax will be payable by the employee on the value of the benefit. This is calculated by deducting the price the employee has paid for the computer ([pounds sterling]250) from its then market value ([pounds sterling]650), leaving a taxable benefit of [pounds sterling]400.

As can be seen from the above examples, the "Home Computing Initiative" provides a useful partial exemption from tax in respect of the loan of computers to employees for use at home. In many cases, the use of this partial exemption will prevent the employees from having to pay any tax at all. This partial exemption is not, however, available on the transfer of ownership of such a computer to an employee and tax will become payable in those circumstances.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Mr Jonathan Chapper

Bristows

3 Lincoln's Inn Fields

London

WC2A 3AA

UNITED KINGDOM

Tel: [phone]

Fax: [phone]

E-mail: [e-mail]

URL: www.bristows.com

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