When a mobile phone starts to cost

In theory when an employer provides a mobile phone to an employee the employee is not liable to tax on the benefit, nor is the employer liable to national insurance on the phone provided.  Sounds simple, but as ever the rules are complex and there are a number of pitfalls that will catch the unwary.

The main traps to be aware of are:

  • Where the contract is not between the employer and the phone company
  • Where the phone is a Personal Digital Assistant (PDA)
  • Where more than one phone is provided

Contract
In order for there to be no personal tax issues for the employee, the contract for the provision of the mobile phone and airtime must be between the employing business and the phone company.  If not then there could be significant tax issues.

It is not always as simple as checking the bill.  Although the bill may show the employer’s name and address, the mobile phone contract may be a personal one between an individual and the phone company (personal contract).

If an employer then pays these bills, the amounts paid are treated as payments of net salary to the individuals on which National Insurance will become due.

The tax treatment will depend upon whether the employer pays the bill directly or reimburses the employee for the phone bill.  Either way the employee will suffer some tax on the amounts paid by the employer.

The only way to avoid this problem is ensure that the mobile phone contract is between the employer business and the phone company.

 

Digital Personal Assistant (PDA)

The phenomenal rate with which technology has advanced has resulted in significant changes to the size and functionality of mobile phones.  Unfortunately, the tax legislation has not changed with the technological advances.

The tax rules treat mobile phones and computers provided to employees differently.  If a mobile phone is provided then a tax benefit will not arise on the employee, irrespective of whether they make personal calls on the phone or not.

If a computer is provided for purely business purposes then no benefit will arise on the employee.  However if there is significant private use of the computer then a benefit in kind will arise on which the employee will pay tax.  There is no definition of what is significant use and this will be decided on a case by case basis.

Why should we worry about computers?  Well the legislation definition of a mobile phone is very tight.  For the phone to be treated as a mobile phone it must have been designed primarily for transmitting and receiving spoken messages.

Mobiles that play music, surf the net, receive emails and play games, such as a Blackberry or an iPhone, are considered by HMRC to be computers, rather than mobiles phones.

Why is this a problem?  If the mobile phone is classed as a computer then there is a chance of the employee being liable to tax on the phone, depending on the amount of private use.

 

More than one phone

If an employer provides two mobile phones to an employee, extra care is required.  If the phones provided are both classed as mobile phones, per above, then the employee would be liable to tax on the second phone, assuming that the first phone met all the conditions and the contracts are between the phone company and the employer business.

However, if both phones are treated as computers, then the employee may be liable to tax on the two “computers” depending upon the level of private use.  The interesting thing is that if one handset is classed as a mobile and the second as a computer then providing that any private use is on the mobile only, or any private use on the computer handset (PDA) is not significant then the employee would not be liable to tax on the handsets.

Providing that there is no tax bill for the employee then there will be no corresponding National Insurance liability for the employer business.

Extract taken from our 2010 Summer edition Tax newsletter – if you would like to subscribe please leave your details here.

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