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HMRC internal manual

Employment Income Manual

Particular benefits: computers: partial exemption general: Home Computing Initiative: years up to and including 2005/06 only

Section 320 ITEPA 2003

The computer exemption is abolished for 2006/07 onwards. For the tax treatment of a computer provided for private use from 6 April 2006 onwards see EIM21699.

Years up to and including 2005/06

Where a benefit consisted in an asset being placed at the disposal of a director or employee, the usual rules for determining the benefit (see EIM21630) were modified if the asset was a computer or peripheral equipment. The first £500 of cash equivalent of the benefit (see EIM21631) was exempt from tax. If the cash equivalent of computer equipment and running costs exceeded £500, only the excess over £500 figured in the calculation of the benefit to the employee. See the examples at EIM21703.

How the exemption worked

The exemption created an exempt “bottom slice” of the first £500 of cash equivalent. Consequently if an employer owned a computer that he provided to an employee, for:

  • computer equipment worth up to £2,500 (annual value 20% of £2,500 = £500), or
  • computer equipment worth say £2,000 (annual value 20% of £2,000 = £400) and maintenance expenses of £100 yearly, or
  • any other combination of annual value and yearly running expenses that did not exceed £500,

the employer did not have to report any benefit on Form P11D. Remember that the “second hand” market value of computer equipment was almost always less, sometimes much less, than the employer paid for it. So in many instances an employer had nothing to report, and the employee had nothing to put on their tax return, in respect of a provided computer.

If the employer leased a computer provided to an employee, the cost of the benefit was the higher of the annual value and the annual leasing charge (EIM21631). For example, if an employer leased over three years a computer with a value of £2,500, the annual leasing cost was £833. This figure exceeded the annual value of £500 (£2,500 x 20%). So the cost of the benefit was the higher figure of £833 but the first £500 was exempt, leaving the balance of £333 to be charged as a benefit.

The £500 exemption applied for each year of assessment. If the computer was first provided part way through a year the £500 was not time apportioned. The full £500 exemption applied in calculating the cash equivalent for the year. The same applied in a year when the computer equipment ceased to be provided.

Applying the exemption to an earnings charge

Before 6 April 2004, this exemption applied only where a benefits charge would otherwise have arisen on an employee for the loan of a computer by the employer.

If an employee had the alternative of taking a loaned computer or a cash equivalent in salary, Case Law (Heaton v Bell 46TC211) provided that in such circumstances a money’s worth charge arose under Section 62, instead of the general benefits charge under Section 201, even if the employee took the computer and not the cash. In these circumstances the exemption could not apply.

From April 2004 the exemption was extended to apply where the benefit would be taxable as general earnings under Section 62(3), provided of course that the employee took the computer and not the cash equivalent.

For more information on the computer exemption, see:

  • EIM21701 for what computer equipment the exemption applied to
  • EIM21702 about the exclusion from relief of arrangements which favoured directors over other employees
  • EIM21703 for examples of how the exemption worked
  • EIM21652 for the interaction between the computer exemption and the cost of a benefit when a computer provided as a benefit was later given to an employee
  • EIM21653 for examples of how to determine the cost of the benefit when a computer previously provided as a benefit was given to an employee.

Home Computing Initiative (HCI)

In 2003 the computer exemption in Section 320 was re-launched as the Home Computing Initiative. It included a measure designed to ensure that no charge to tax could arise on the benefit under the general earnings provisions. This was necessary as many employers were linking the provision of a computer to a salary sacrifice arrangement (EIM42700).