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HMRC internal manual

Employment Income Manual

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HM Revenue & Customs
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Benefits: computers: partial exemption: examples: 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

Example 1 (terms for directors no more favourable)

A seafood distribution company with two directors and twenty other employees provided computers for the directors and five of the employees. All the recipients were allowed to use the computer for private and family purposes. Three of the computers had a market value of £1,500 and have modems. The directors and a senior employee got these because they needed to keep in touch by e-mail. The other four computers had a market value of £1,000 and were provided to the sales force. The company had a service contract for maintaining the computers and paid a global annual premium of £680. This was broken down to £120 a year each for the more expensive machines and £80 each for the cheaper ones.

Exemption is due as follows:

The directors and the senior employee      
       
Annual value of the computer 20% of £1,500 = £300  
Yearly running expenses   £120  
Total   £420  
Less exemption   £500  
Cash equivalent of benefit   £NIL  
The other employees      
Annual value of the computer 20% of £1,000 = £200  
Yearly running expenses   £80  
Total   £280  
Less exemption   £500  
Cash equivalent of benefit   £NIL  

Note that although not all the employees got the same value of equipment there was nothing particular in the terms on which the computers were provided that made the provision to directors more favourable than the provision to other employees. Exemption was therefore due.

Example 2 (telephone charges not exempt, exemption did not fully cover cashequivalent)

A husband and wife were the sole directors of a scrap metal company. There were no employees. The company rented a yard that had a small lock up office. During the day the husband handled metal in the yard while the wife dealt with accounting for cash transactions with buyers and sellers and credit transactions with major suppliers. She kept track of the stock of metal, cash, bankings and the major suppliers’ accounts on a computer in the office. Its market value (see EIM21632) was £2,000.

She wanted her husband to learn how to use a computer so he could help her with the books. The company bought another computer. Its market value including peripheral equipment and software was £2,500. It was kept at the directors’ home. Occasionally she used it for keeping the business records up to date but there was no real need for this, she had everything she needed at the office. The computer at home was mostly used by the husband who realised he needed to be familiar with computers to help in the business, and by their children who used it to play games and surf the internet.

The company paid £120 a year on a maintenance contract for the computer at home, £120 line rental on a telephone line for connecting the computer to the Broadband Internet, £500 in call charges on that line and £100 to an Internet service provider (ISP) for the right to use that service provider’s equipment, search engines and other software.

The computer in the office was exempt from tax on employment income. This is because although it was a benefit provided to the wife, it was provided on premises occupied by the employer and used by her in the performance of her duties (see EIM21610).

The telephone line rental, the call charges and payments to the ISP for the computer at home are taxable benefits. The cash equivalent totals £120 + £500 + £100 = £720. None of these costs was exempt under the computer equipment exemption because of the exclusion of telephones and internet connection from the definition of computer equipment. In certain circumstances (see EIM21617) the costs of connection and calls to the Internet from home paid by an employer may be exempt from charge, but those circumstances do not apply in this instance.

The other items have the potential to be within the exemption. The calculation of the cash equivalent is:

Annual value of the computer 20% of £2,500 = £500  
       
Yearly running expenses Maintenance contract £120  
       
       
Total   £620  
Less exemption   £500  
Cash equivalent of benefit   £120  

It is most unlikely that any deduction for necessary expenses (see EIM21210 and EIM21637) would be due in respect of the limited business use of the computer at home. This was because the “necessary” test (see EIM31645) would rule out relief.

Example 3 (terms for directors more favourable)

A company that designed and manufactured microcomputers for special purposes had two directors and ten employees. The employees were provided with computers and software for use at home. The directors accepted that the employees were likely to use the computers to write the occasional letter and prepare Christmas card mailing lists, so they did not formally prohibit all private use. However use of the machines for idle game playing was discouraged and loading software other than that supplied or approved by the company, or downloading files from the Internet, posed such a danger of introducing viruses into the company’s systems that it was prohibited on pain of dismissal.

One of the directors had a hobby interest in oceanography and weather systems and he combined this with his work interest in computing by writing software to perform mathematical analysis of data about ocean currents and weather. There was no intention that the company would develop this commercially though he thought he may be able to develop software that he personally could sell. The analysis needed a lot of computing power and the company built and lent to him a special computer with parallel processors which enabled the calculations to be done in minutes rather than days. The machine cost £8,000 to build and had a market value of £5,000.

No £500 exemption is due. When all the facts were considered it is clear that the terms on which the computer was provided to the director differ from, and are more favourable than, the terms on which they were provided to employees.

Example 4 (exemption did not fully cover cash equivalent, computer necessary toperform duties, part private use)

A magazine publishing company employed graphic designers who did much of their work at home. They were provided with computers, scanners, colour laser printers and software with a market value of £6,000. All the employees occasionally used the equipment for private purposes and one was able to demonstrate that it was used for work 80% of the time and privately 20% of the time. At no time was the equipment used concurrently for work and private purposes. That employee paid tax on employment income as follows:

Annual value of the computer 20% of £6,000 = £1,200  
       
Less exemption   £500  
Cash equivalent of benefit   £700  

From the cash equivalent the employee could claim a deduction in respect of the use of the benefit for performing his duties (see EIM21637 and EIM31661). The amount of that deduction was 80% of £700 = £560. The employee would therefore pay tax on a net benefit of £140.