I have taken a look at the tax treatment of mobile phones, one of the most commonly provided bits of employee kit. I shall be following this up with articles on other common issues such as computers and broadband provision, in readiness for the dreaded P11D round, which is looming on the horizon.

A single mobile phone provided by the employer on which an employee can make private calls is tax free. Until April 2006, employers could provide an unlimited number of "perk" phones without an employee incurring a tax charge, but now there is a single phone limit.

A company phone, however, is one where the contract to provide the phone is in the name of the company (or employer). If the phone is in the name of the employee the exemption does not apply, and the phone will be taxable to the extent that it is used privately. This can produce a substantial tax charge - see below.

If an employee has a second phone in the company name on which private calls are made this is fully taxable – although employees may choose which is the benefit phone for the year. Details of how to compute the benefit in kind on a taxable phone are below.

At present BlackBerrys and other PDA’s are regarded as computers, but you should bear in mind that with advances in telephone technology this could change.

Computing the benefit in kind

Where a phone is taxable, the first step is to accumulate the total of all of the bills for the tax year. This total can be reduced by deducting the costs which relate wholly and exclusively to the business use.

Unfortunately air time charges (minimum contract price) are not wholly and exclusively business where the phone had private use as they provide the phone for private as well as business use, so no deduction is available in respect of the basic contract charges. Only "out of bundle" minutes relating to business calls would therefore be deducted, leaving the full contract payments plus any private out of bundle minutes as the taxable benefit.

There would also be a benefit calculated at 20% of the list price of the handset, but as these are often free of charge in relation to contract phones, this may not be an issue.

HMRC Example

The following example is provided in the Employment Income Manual, and although in connection with an employee provided phone, is quoted in other parts of the manual.

“EIM 32951. A construction engineer often works out of the office on construction sites. She uses a mobile phone so that she can keep in touch with the office. The phone is mainly used for business calls.

The tariff for the mobile phone includes up to 10 minutes of free calls each month. In one month she pays £22, which is the rental charge only, because her total calls, all of which were business calls, amounted to 8 minutes. No deduction can be permitted because no expense has been incurred in making the business calls.

The following month she pays £28, which is £22 for rental and £6 for calls. Calls that are charged are paid for at a rate of 20p per minute. In the month she made calls totalling 40 minutes, of which 30 minutes were for business and 10 minutes were private. A deduction should be permitted for the cost of business calls. The amount that can be deducted is £4.50, which is 75% of the call charges, because 75% of the total call time was made up of business calls.”

Phone in employee name

Where the phone contract is in the name of the employee, the benefit is calculated in the same way as described above, so no deduction is available for contract charges. However, when a phone is provided in this way, the payments made by the employer should really be put through the payroll, as the phone is not taxed under the benefit in kind rules. The company is paying a liability due by the employee, and this counts as pay for tax and NIC purposes. This means that Class 1 NIC's, not Class 1A are due on the payments, with a consequent employee liability unless they earn in excess of the Upper Earnings limit. This issue is likely to become more common next year due to the huge hike we have seen in the Upper Earnings Limit.

And the VAT

When the phone is in the name of the employer, VAT may be recovered in respect of the business use. The employer should apportion the VAT recovery - HMRC accept a sample based approach to restricting the VAT rather than requiring detailed analysis of overy bill.

If the phone is in the employee's name then no VAT is recoverable, as the VAT is not incurred by the employer.