Introduction
Many contractors purchase computers through their company and use them at home for both business and personal use.
This article explains the tax issues relating to employer provided assets, including computers.
Calculating the “benefit in kind” of an asset
Where a company provides an employee with the use of an asset other than a car, van or living accommodation, the cash equivalent of the benefit is 20% of the market value of the asset at the time of its first availability to the employee, plus the full amount of any running costs incurred in providing the asset.
The cash equivalent (or benefit in kind) is reduced proportionately where there is part business use of the asset and is also reduced on a pro rata basis if the asset is only provided for part of a tax year.
Transferring company assets to employees
If the company transfers ownership of the asset to the employee, then the employee would be charged to tax at that time on the higher of:
- the market value of the asset at the time of the transfer or;
- the market value at the time the asset was originally made available to the employee, less the total amounts charged on the employee as benefits in kind for the use of the asset
Rules for computers
Where the asset is a computer, the benefit is calculated exactly the same as above but a £500 computer exemption applies to any amount chargeable.
This exemption does not apply where the equipment is only available to directors or if the equipment is made available to directors on more favourable terms than to other employees.
Computer equipment includes printers, scanners, modems, discs and other peripheral devices connected to and inserted into the computer and also relevant software. The use of a telephone with a modem however, will give rise to a separate benefit in kind.
Example:
A company supplies an employee with a computer which costs £4k. In addition, the company takes out an insurance and maintenance contract for an annual cost of £350. The computer is used 80% for business purposes.
The calculation will be as follows:
Cost - £4,000 @ 20% = £800
Annual running costs = £350
Benefit = £1,150.
After deducting the computer exemption of £500, leaves a taxable benefit of £650.
The employee claims an 80% business use deduction, so pays tax on £650 x 20% = £130.
Even if they are a higher rate tax payer paying 40%, they still get a £4k computer with the insurance and maintenance contract, for a tax bill of £52 per year!
Practicalities for contractors
For many contractors the private use is likely to be negligible, so the benefit in kind will probably be less than the £500 allowance.
Where the contractor is a one man Limited Company, a tax inspector could argue in theory that the computer is provided solely for the director, and therefore the £500 allowance does not apply. In practice this argument is never put forward.
In the unlikely event of this argument from an over zealous tax inspector, one could argue that all company employees, whether a director or not, are entitled to have a computer at home. The fact that the company in question happens to be a one person company, does not contradict with the wording of the law. A fall-back argument would be that the "business", as opposed to the "employee", needs a computer to carry out it's work and that any personal use is incidental.
David Colom
Principal
D J Colom & Co Chartered Accountants
David Colom qualified as a Chartered Accountant in the City of London in 1981 and is the founder and principal of D J Colom & Co Chartered Accountants established in 1989.
Started specialising in serving IT contractors in 1993 and is now one of the longest standing suoppliers of accountancy services to computer contractors.
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The legislation does not specify whether it makes any difference that the computer is a laptop or not. In the event of a HMRC query, it would be preferable to be considering a laptop, since that is indicative of using the computer on contract sites.
Published: Wednesday, May 18, 2005
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