Contractors claiming the cost of a mobile phone, smartphone or similar mobile device from their contracting business must abide by HMRC’s strict expenses rules, which are not straightforward and can catch contractors unawares. That’s the warning from James Abbott, Tax Partner at contractor accountant Baker Watkin.
“Contractors who claim the cost of a personal mobile phone used for business purposes can be caught out by what HMRC allows them to claim,” explains Abbott, “and having more than one business phone or using a business smartphone can attract unwelcome tax liabilities.”
As with all expenses, Abbott urges contractors to keep personal mobile telephone expenses strictly separate from legitimate business communications costs. That way they will ensure they stay compliant and avoid the unwelcome attention of an HMRC investigation.
Mobile phones held in the company’s name
“Ideally, contractors should start a mobile phone contract in the name of the business,” continues Abbott. “Simply asking the mobile operator to add the company name and address to the monthly invoice is not enough; the actual contract must be with the contracting business and not the contractor.”
According to Abbott, this is an important subtlety that catches out many. In his experience, contractors often flout the rules in this way without realising they are doing so, potentially leaving them liable to penalties and back taxes if investigated.
“If the contract is directly between the contractor’s limited company, then the full cost is an allowable expense paid directly by the business,” explains Abbot. “That’s because HMRC expenses rules state that the company can provide contractors with one mobile phone for business purposes that is exempt from tax as a benefit in kind (BIK).”
A second business mobile is a ‘benefit in kind’ and taxed accordingly
Abbott warns contractors that whilst the first phone per employee is tax free, the second will attract tax as a benefit in kind. “Let’s say the second mobile phone or smartphone account costs £30 per month and comes with a free handset. That’s £360 plus VAT that will attract tax at the highest rate, plus employee and employer’s National Insurance Contributions (NICs). The contractor would have to declare £432 on their P11D and be taxed accordingly.”
“Of course,” he adds, “if a contractor limited company also employs the contractor’s spouse or partner who has duties that would justify the use of a mobile phone, it would also be able to fund a second tax-free business phone for the spouse or partner.”
How not to claim for personal mobile phones used for business
Incorrect expenses claims for the business use of a personal mobile phone are one of the most common contractor accounting mistakes that Abbott comes across, and claims largely arise because the rules can seem counterintuitive.
Abbott cites an example: “Let’s say a contractor has a personal mobile phone costing £30 a month with an inclusive calls allowance, and they work out from their itemised bill that they have used half the call allowance for business purposes. Logic would suggest that they could claim half the monthly line rental as a business expense. But that’s not the case.”
He continues: “HMRC’s expenses rules always consider the ‘marginal cost’, or additional costs, of what an employee incurs in the performance of their duties. In this example, the contractor paid £30 per month before making business calls, but there was no marginal cost of the business calls, so the contractor cannot claim any element of the line rental as an expense.”
And what’s even worse, if the contractor does claim £15 a month for 50% of the line rental in this scenario, this payment should be taxed as salary and attract income tax, as well as employee’s and employer’s NICs.
Itemised additional costs of calls and pay-as-you-go top-ups are eligible
Additional call costs for business purposes can be charged as long as the contractor receives an itemised bill. For example, if a contractor uses all the inclusive minutes and then incurs additional call costs that are a combination of business and personal calls, then the business calls can be claimed as expenses.
“Pay-as-you-go calls, which are similarly itemised, can also be claimed,” says Abbott. “Because a contractor pays for the top-up in advance, technically these are always marginal, or additional costs and can be claimed as an expense.”
Complications arising from using smartphones on a business tariff
HMRC’s rules about allowing each employee a single company mobile phone for business purposes also extend to smartphones.
If a contractor finds that their personal use of their smartphone is more than 'insignificant', then they will receive an annual benefit in kind tax charge based upon 20% of the cost of the asset, which is their smartphone
James Abbott, Baker Watkin
But choosing to use a smartphone rather than a handset designed for calls only changes the tax treatment of the potential benefit, as Abbott describes: “HMRC classes smartphones as computers. This means smartphones are treated by HMRC as ‘assets made available to an employee’ and not services.
“If a contractor finds that their personal use of their smartphone is more than ‘insignificant’, then they will receive an annual benefit in kind tax charge based upon 20% of the cost of the asset, which is their smartphone.”
James Abbott heads up Baker Watkin's tax department and often speaks on freelancer / contractor tax matters. He has his own portfolio of contractor clients.
Baker Watkin are PCG Accredited Accountants and UK200 Group members based in Hertfordshire.
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Abbott concludes: “The tax treatment of mobile phones and smartphones used for business purposes is not as straightforward as it might appear, and if in doubt contractors should consult their accountant or tax adviser to confirm that they are claiming mobile telephony costs compliantly.”
Published: Wednesday, March 30, 2011
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