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Employee benefits - phones, BlackBerrys and tax by Rebecca Benneyworth

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2nd Mar 2009
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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.

Best of 09 WinnerA 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.

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Replies (20)

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By User deleted
27th Mar 2009 14:16

Company t/a
If a company has a bank account "XYZ Ltd t/a Fred Bloggs", as he is also known by his individual name as well as company name, and sometimes people make cheques to him individually so this is convenient for business (even though both trading names are for the same basic business).
Would this then make it ok for Fred Bloggs to have the mobile bill in his personal name, as it is a trading name of the company? ie no taxable benefit in kind would be due?

Or would he have to do the bulk of his business on "Fred Bloggs" letterheads etc to prove this was the case?

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By leon0001
06th Mar 2009 18:24

Incoming mobile calls
I have come across a mobile contract with minimal use of "free" minutes. The primary use of the phone was to receive incoming calls, diverted to the sole proprietor from the main office telephone number. The main use of airtime could be demonstrated as receiving business calls, as evidenced by the diverted calls on the landline bill. Surely in this case, the mobile rental charge is mainly business?

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By abelljms
05th Mar 2009 15:55

real companies?
The comments by Rebecca I am sure are 100% korekt! However the reality is that most phones in SMALL companies are in names of users/directors.

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By User deleted
05th Mar 2009 15:53

let's help new & small businesses
This is not at all helpful for new / early stage businesses and small businesses who cannot get credit from telephone companies, so directors/ entrepreneurs end up using their personal creditworthiness to support the business, thereby creating an unexpected personal tax liability.

Some common sense would help all round, rather than more red tape and complex rules about something so simple as a telephone.

What happened to all these initiatives to reduce red tape for business?

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By User deleted
05th Mar 2009 14:16

Riduculous rules
I tried to get a phone contract in my company's name but could only get one at about twice the price I could as an individual. And now I am going to be penalised for tax despite there being no practical difference except the name on the bill. HMRC needs to get in the real world.

Does the same apply to company cars? I know of a number of people who have 'company' cars but have them registered in their own names as they are easier to sell later. The company pays all the costs but the documents are in the individual's name. Presumably on that basis HMRC would regard them as being owned personally.

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Rebecca Benneyworth profile image
By Rebecca Benneyworth
05th Mar 2009 13:39

Computers
I'm doing computers, broadband etc for next week....I'll include comments on data on phones.

Jason, I do understand your comment about "silly rules" but the difference between something provided by the employer (potential benefit in kind) and something reimbursed to the employee (taxable expense payment) is an issue that has been with us for all of my career, and probably since these areas of tax law were written. I don't dispute that it is confusing, especially for the business person, but sadly I think that to change it would be such a mammoth task that it will never get high enough on the agenda. Indeed I can imagine that changing it could potentially lead to other sillies arising. My view is that what makes a good adviser useful - watching and warning that there are anomalies in the system and businesses need to think about how they organise things so that no surprise tax liabilities arise.

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By markfaherty
05th Mar 2009 17:19

Two phones
I have had Inspectors accept that, where there are two mobile telephones, one business and one private, the business phone is allowed in full. The argument put forward is that, although there may be the occasional private call on the business phone, it is primarily for business and whilst the private phone has, on occasions, been used for business, no claim is made in this respect. It has to be shown, of course, that the calls are primarily business from the statements and I have advised clients to have a cheap PAYG phone as the private phone with top-up receipts. The same theory has worked with nil private use restrictions on cars used for business where there are two cars. I appreciate that success in this respect relies alot on the pragmatism of the Inspector involved.

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By markfaherty
05th Mar 2009 17:44

Biggest losers
In response to Malcolm Swallow, although this is a little off topic (P11D's), sole traders and partners are in the same boat - according to the rules they should not be allowed the cost of the call plan/tariff, only the business calls outside of this. Where a person has only one mobile phone it is almost impossible to argue that there is no private use at all and therefore the tariff cost fails the wholly and exclusively test and is excluded as an expense by virtue of Section 34 ITTOIA 2005 (formerly Section 74 ICTA 1988 for sole traders and partnerships; although this section still remains appropriate for companies). There still remains a weak argument that an identifiable proportion of the expense might qualify by comparing the ratio of the time spent on business/private calls within the "free" calls - Copeman v William Flood & Sons Ltd, 1940. This would be a time consuming exercise, however, and the value moot depending on the cost incurred.

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By markfaherty
06th Mar 2009 15:00

PAYE or P11D
David D, you are not confused. All settlement of pecuniary liabilities are included in the payroll for NIC ONLY and entered on the P11D for tax.

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By markfaherty
06th Mar 2009 14:41

One phone
My point was where there was only one home phone.

It IS arguable, I do not disagree, but unlikely to succeed. Remember that the apportionment of expenses where there is mixed use is only a concession. The Revenue has a longstanding position where it will accept splitting car and other costs, such as use of home, on a just and reasonable basis, but it has an equal longstanding opposition to conceding this in respect of telephones.

Just to illustrate the concession nature of apportioning expenses, in a recent enquiry an Inspector disallowed some of the client's business journeys in his van because he stopped en route to do some shopping or similar private activities. This did not add to the journey nor increase the cost but he argued that it had a duality of purpose and all such journeys should therefore be disallowed in full. Despite my best endeavours he would not budge and, in view of the overall additional tax burden involved, it was not considered cost effective to take matters further. By the letter of the law he was, of course, correct but in my opinion was not in the spirit of the just and reasonable apportionment concession.

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By AnonymousUser
06th Mar 2009 12:48

Home phones
If you have 2 phone lines one business one private to your house and the number of the first is advertised as your business number to clients, I think HMRC would be hard pushed to argue that just because you made a private call on it the whole line rental should be disallowed.

Ditto on mobiles where the contract is for business use eg it is the number given out to clients etc.

But I entirely agree it makes the whole position far more robust if you have 2 separate phones.

I don't really see the difference to a car. A car has standing costs such as road tax, servicing etc and these are apportioned by reference to mileage. Same should apply to phones . Just because HMRC don't want to do it, does not mean not arguable.

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By User deleted
06th Mar 2009 11:59

Phone in employee name
Rebecca refers to applying PAYE via the payroll in the example where the employer settles the pecuniary liability. I always thought that PAYE only applies where cash is provided and that for settlement of pecuniary liabilities, payroll was only used for NI and P11d to tax? Confused

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By markfaherty
06th Mar 2009 11:45

Sole trader telephone
The main difference between the apportionment of some expenses and that of the contract cost for the mobile phone harks back to that old chestnut; the home private telephone used partially for business. Where there is only one telephone the line rental is always private, as this would have to be paid irrespective of business use. The Revenue has carried this on to mobile phones despite many businesses obviously applying for high volume free calls within the contract for the high business use. It is inequitable but try arguing it with an Inspector.

It is also easy to apportion car costs by mileage records but the Inspector will argue that you cannot use this type of basis on the contract cost of a mobile because there is no value apportioned to the calls within the talk-plan. Even if you know the time spent on the calls you cannot with any surety know the cost for each call.

The best policy, to present the strongest argument, is to have two phones, one business and one private.

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By AnonymousUser
06th Mar 2009 09:55

Sole traders and phone contracts
BIM 42130 and 42135 support the notion variously that expenditure can be apportioned and that private benefit can be incidental.

It may well be that strictly on case law a contract which is obtained primarily for business but has some private use should be wholly disallowed. However, how is this to be differentiated from say a hire purchase contract for a car with mixed use - where it is commonly accepted that the interest can be apportioned by reference to the use of the car (and HMRC give I think such an example).

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By User deleted
05th Mar 2009 10:13

2 phone or not 2 phone that is the question
Martin

Blackberrys and PDAs would be covered under S316 - which allows equipment to be used away from the workplace

As most would consider Blackberrys to now be both a phone and a PDA care would have to be given if for some reason the employer gave the employee another mobile phone. To make sure that no tax charge would arise you would either bar private use on one of the "phones" or make sure that private usage was insignificant on one of them.
Why someone would choose to carry two phones is another question.

Sayingthat the one exception would be if a phone was only usable for overseas calls

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By m.wardle2
05th Mar 2009 09:24

Blackberrys
Rebecca

You say that Blackberrys are currently treated as computers and not phones. Does this mean they are not covered by the exemption if provided by an employer (contract in employer's name etc)?

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By jbrameld
05th Mar 2009 08:18

silly rules
Can anyone explain the workings of the mind of HMRC relating to the difference between providing a phone (tax-free) and reimbursing a personal phone (taxable)?

On this basis, for an employee with their own telephone with significant business usage, the tax liability would be reduced by dropping to the lowest possible inclusive minutes tariff, and then providing a bill analysis every month to offset the cost of the business minutes which would be charged above the basic tariff. This is rather a pain to do though, and would ultimately cost more in mobile phone charges due to the structure of most tariffs.

For people who only make the odd call now and then, it isn't so much of an issue, but for significant business users of personal phones this can make a lot of difference.

Also - what is the position with mobile phones with a data receiving capability, and the associated charges within contracts for these? - eg an employee has a personal phone and spends a lot of time out of the office on project sites. In order to keep up with e-mail, they use a web-based service on their phone and pay a separately idetifiable monthly charge in their contract for this. If this is reimbursed by the employer, is it taxable or not?

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By User deleted
04th Mar 2009 13:12

The principles are pretty well established
The monthy air time fee (and inclusive minutes) provides the phone for both business and private use, and can never be "wholly and exclusively" business unless there is no private use of the phone at all - then there would be no benefit in kind.

The "over and above" minutes might be a mixture of business and private but each call is either wholly business or wholly private (generally speaking) and so apportionment is possible - each call is a separate cost in itself.

I am sure that a whole year approach could be possible, allowing that the airtime would always be taxable. An "average" of the out of bundle minutes might be possible for some users, but for very small companies the use may be so variable as to make an average difficult to arrive at.

Unless and until the above approach changes (and it is a very long standing approach - dating well before mobile phones back to landline rental) this will remain the case.

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By Paula Sparrow
03rd Mar 2009 20:43

Is the Revenue's analysis of the calls position correct?
In the first example they are saying that no costs are reclaimable because the business calls are within the free minutes of the tarrif, so that no additional costs have been incurred as a result of the business use.

In the second example they are saying that 75% of the call costs are allowable because that is the ratio of business to private calls. However, the private calls are within the free calls on the tarriff, and it is the business calls which are causing the whole of the additional charges.

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By CJMaslen
15th Feb 2017 18:18

What happened to tax simplification? This whole area must account for huge amounts of HMRC, business and professional time spent on what in the end amount to trivial amounts of tax.

The whole tax system is crying out for drastic simplification yet successive Chancellors do nothing but introduce pointless cosmetic measures most of which have little effect in the long run.

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