IT - 24.02.2010

An unlikely way to save tax…

Benefit-in-kind

Many companies provide laptops for employees, e.g. sales staff and directors, to use for business while away from the office. Prior to April 2006 a benefit-in-kind (BiK) did not generally arise on the private use of computers by employees, but the tax law has changed where a new computer is provided to an employee after April 5 2006. From that date there is a risk that allowing private use will result in a benefit-in-kind arising on the employee and extra employers’ NI contributions. But that isn’t necessarily an issue.

Note. Tax-wise, you can claim a deduction for the cost of the computer against its tax, and you won’t be charged on a BiK. You won’t even be charged a BiK if you use it for personal reasons providing its use is “insignificant” - and according to HMRC this can be up to half the total usage!

Taxman’s tricks

However, in certain instances the Taxman might be happy with the tax-free status of the laptop, but hone in on the programs being used. This is a different kettle of fish entirely - and could end up costing you: whilst insignificant personal use of the laptop is permitted and exempt from a tax charge, use of the programs isn’t.

Example. Shadow Supplies Ltd provides one of its directors with a laptop to use at home. It also pays for an all-singing-all-dancing version of an Adobe suite including Photoshop and Powerpoint, which costs £2,800. What’s more, it’s multi-licence, so the director pops the software on to his son’s computer to help him with his school work. The result? A tax bill on a £560 BiK (£2,800 x 20%) for each year the programs remain on the son’s PC. It will also cost Shadow Supplies £72 in NI contributions.

The rule? Make sure that employees understand that multi-licence software packages should not be installed on computers that won’t be used for business. Even if the company owns it, they’ll still get lumbered with the 20% BiK charge.

There are good reasons for allowing private use, including the maintenance of employer/employee relationships and the development of computer skills by the employee. So is there a way around this?

Tax tricks of your own

The annual value is 20% of the market value of the asset at the time it was first used to provide a benefit-in-kind. This is charged every year. The first thing Shadow Supplies needs to do is take it off the son’s computer immediately. How can the son do his homework though? Instead, why not let him use the company’s laptop to do the homework that requires Adobe. This means the insignificant use rule applies and there’s no BiK to pay.

Tip. The other option to think about is having the company buy a PC for use at home, on which the software is installed and the whole family can use it under the insignificant use rules.

What you’ll save

It depends on how long the software has been on the son’s PC. In the case of Shadow Supplies Ltd it was from 2008, so that’s two years - so they could have saved themselves £1,120.