The Finance Act 2006 withdraws the Home Computer Initiative ("HCI") relief for computers provided for private use. We look at why the Government has taken this step and the consequences.
Under the Income Tax (Earnings & Pensions) Act 2003 ("ITEPA"), tax relief was available for £500 of any benefit received in the form of the provision of computer equipment. As the benefit in kind charge was worked out as 20% of the value of the equipment provided,, this meant that £2,500 of equipment could be provided in any tax year before an income tax charge arose.
Not any more. The relief has now been withdrawn except where an agreement for the provision of computer equipment was entered into before 6 April 2006 (even if the equipment was delivered after this date). As most equipment provided by employers is under three year leasing arrangements, the relief will mostly disappear by April 2009.
The Government's view was that this relief was being abused and that some employees included digital cameras and games consoles in their "computer package".
There had also been well documented issues surrounding salary sacrifice arrangements, which meant that if a salary sacrifice arrangement was entered into to provide computer equipment, the employee could end up being paid below the national minimum wage.
However, the removal of HCI came as a shock out of the blue, including to at least one government department which was about to introduce it. Responsibility for the lack of consultation and the consequential waste in professional and other fees and the disruption to the provider market can only be laid at the government's door.
When is there a charge?
Let us not forget that simply providing a computer to staff does not give rise to a tax charge. Where a computer is provided wholly for business purposes no benefit will arise. This does not need to be reported under the PAYE Regulations (SI 2003 No 2683) as no benefit has arisen. In addition, the use is not considered "earnings" so there is presumably no need to make an entry on the Form P11D or employee's tax return.
There also remains an exemption in respect of work related training (section 250 ITEPA 2003). But a training related asset is (at best) defined as an asset "provided for use only in the course of the training" If the computer provided under this provision is used for any private use outside training then the relief will not be available.
Concerns for the Future
The main concern following the abolition of the HCI relief will be the possibility of a tax charge arising for personal use. HMRC's (HM Revenue & Customs) view seems to be that if private use is "not significant" no taxable benefit will arise. The problem is how to determine "significant". Should the employer agree with HMRC what percentage of use should give rise to a taxable benefit? How does the employer measure that use? Is it worth carrying out the calculation at all, bearing in mind the amount of tax involved? Could the employer and HMRC reach a PAYE Settlement Agreement or, where personal use is insignificant, a dispensation?
A similar approach might be taken in respect of internet connection, which is also tax exempt under ITPEA providing access is paid for work purposes, the package does not allow for separate billing and private use is not significant.
Bad News for Blackberrys
Interestingly, personal digital assistants and Blackberrys are treated as computers and not mobile phones. Therefore, the withdrawal of the relief will affect users of these devices.
The abolition of the relief may simply be to save money. However, the additional administrative burden imposed on employers and HMRC when trying to fathom a charge for private usage may incur significant extra costs for a very minimal return.