Scope of the Exemption
An employer can provide a mobile phone to an employee without triggering a tax charge under the benefit in kind provisions provided that certain conditions are met. The legislation provides that no liability to tax arises in respect of the provision of one mobile phone for an employee without any transfer of property in it.
The first point to note is that the exemption is only relevant where the contract for the phone is between the employer and the employee. If the employee has his or her own mobile phone, the contract for which is in the employee’s name, and the employer pays the bills on the employee’s behalf, the exemption does not apply. The employer is meeting a pecuniary liability and as such tax is in point. However, in this situation, the employee may be entitled to a deduction for business calls.
In the case of a pay-as-you go phone, similar considerations apply. If the phone belongs to the employer and the employer pays for the top-ups the exemption may apply, provided that the other necessary conditions are met. However, if the phone belongs to the employee and the employer merely reimburses the costs initially incurred by the employee, the exemption is not in point, although the employer may be entitled to a deduction for business calls.
The second condition to note is that the employer must retain ownership of the phone. The exemption only applies where the phone is made available for use by the employee. The exemption cannot be used to give the employee a state of art phone tax-free.
Counting to One
The exemption for mobile phones was revised from 6 April 2007. Since that date it has only been possible to provide one mobile phone to an employee within the scope of the specific exemption for mobile phones. This limit was imposed as an anti-avoidance measure to scupper the development of schemes providing multiple phones to an employee for private use.
Prior to 6 April 2006, there was no limit on the number of phones that could be provided, making it possible to kit out the employee’s family and friends tax-free (and probably at a substantial cost to the employer) without any tax liability arising.
It is still possible for an employee to enjoy more than one phone tax-free, provided that the phones were all made available prior to 6 April 2006. The exemption will continue to apply to all pre-April 2006 phones until the phones concerned are replaced by a new phone or upgraded at the employee’s request. This may mean that the employee may need to consider whether it is worth forsaking an upgrade in order to continue to benefit from tax-free call charges. Depending on the extent to which the phone in question is used, not having the latest model may be a sacrifice worth making.
The exemption for multiple phones made available prior to 6 April 2006 is not lost if the phone is replaced under a warranty that formed part of the original agreement.
Where a phone is made available to an employee on or after 6 April 2006, the exemption is limited to one phone per employee. Deciding whether an employee only has one phone may not always be as straightforward as it sounds. For example, if an employee has two SIM cards to the same number, for example one in a handset and one in a hands-free phone in a car, this will only be regarded as one phone. However, two connections to two different numbers, represents two mobile phones. The limit on one is really a limit on connections rather than on handsets.
What is a Phone?
Most people would think that they would know what a mobile phone is, but the answer to the question `is it a phone’ may not always be clear. The definition of what constitutes a mobile phone for the purposes of the mobile phone exemption was revised from 6 April 2006. From this date, for tax purposes at least, a mobile phone is defined as telephone apparatus that is:
· not physically connected to a land-line;
· is not used only used as a wireless extension to a telephone that is physically connected to a land-line;
or anything that may be used in such apparatus for the purpose of gaining access to, or using, a public communications service. For these purposes, telephone apparatus is taken as wireless telegraphy apparatus designed or adapted for the primary purpose of transmitting or receiving spoken messages and use din connection with a public communications system.
As with many definitions contained within the tax legislation, one is left to make practical sense of whether a particular item that most people would refer to as a mobile phone is actually one is the eyes of the taxman. What is not particularly evident from the legislation itself is that the revised definition extends the scope of the exemption to a connection provided independently of a mobile phone, This means that the exemption applies if the employer provides the employee with a SIM card and the employee uses that SIM card in his or her own handset, provided that the employer contracts with the provider, meets the cost of the calls and retains ownership of the SIM car. The answer to the question `Is a SIM cars a phone’ may well be yes.
Further complications arise as phones evolve and do more than simply make or receive calls. The vast majority of handsets allow the user to text, take photos, send multi-media messages, access the internet, double up as an MP3 player and provide Bluetooth capabilities. As the list of functions increase as new models appear, it becomes increasingly difficult to determine when a device stops being a mobile phone and starts to be something else entirely. This is important as if a device is not a mobile phone it cannot benefit from the exemption for mobile phones.
Particular problems arise in relation to personal digital assistants (PDAs) such as the BalckBerry. Like whether a Jaffa cake is a cake or a biscuit, popular opinion is divided on whether a BlackBerry is a mobile or a computer. HM Revenue and Customs’ answer to this question would seem to be `it depends’.
Early BlackBerrys were predominantly mobile phones and benefited from the mobile phone exemption. However, as technology has developed, BlackBerrys and PDAs have additional functions more typically associated with a computer and HMRC take the view that these `can longer be considered primarily as a mobile phone’. This is a bit of a disaster from a tax perspective. This means that they cannot benefit from the mobile phone exemption and unless provided prior to 6 April 2006 cannot benefit from the old exemption for computer equipment provided for private use. The only tax-free route is to provide one primarily for business use and keep any private use to a minimum so it can be disregarded as incidental.
Thus whilst an exemption exists for mobile phones, all phones are not equal. While the provision of a SIM card alone will qualify, a state of the art Blackberry will not. With demise of the exemption for computer equipment, the mobile phone exemption is potentially valuable. Care must be taken not to stretch the limits and when providing an employee with at first sight appears to be a mobile phone, one must ask whether the taxman would agree.