UHY Ross Brooke Chartered Accountants

Beware of this mobile phone tax trap

It is common for businesses to enter into a contract with a telecoms company to provide mobile phones to the company’s staff. There is no benefit in kind on the provision of the mobile phone as there is a specific provision in Section 319 ITEPA 2003 to exempt such a benefit from income tax.

However, particularly in micro businesses it is not unusual for the contract to be held in the individual’s name, with the company reimbursing the individual for the cost of the monthly contract.

At first sight this may seem to achieve the same end-result, but for tax purposes the result is very different indeed.

If a business reimburses an employee’s mobile phone costs then the monthly line rental and private calls should be entered in the individual’s taxable income and taxed under PAYE. Only the separately identifiable business calls can be claimed as a tax free expense.

Of course, many mobile contracts have a number of texts and calls included in the monthly fee, meaning that it may not be possible to separately identify any business calls at all, in which case none of the contract cost can be claimed by the individual as a tax free expense.

Our recent experience is that HMRC have been taking a very strict line on this matter and it does seem to be a very easy way of raising money for the Exchequer.

Worse still, because it is unlikely that the business will expect the employee to pay the back-tax owing, it will often agree to settle the tax underpaid. HMRC will expect this benefit to the employee to be “grossed-up” and this can lead to a very expensive settlement for the business.

For example, imagine the situation of a higher rate taxpayer who has been using a mobile in his name and has been reimbursed by the company because they regard it as an essential business tool. The contract cost is just £30 a month. HMRC discover this and raise an assessment on the company for the underpaid tax and NIC going back over a period of 4 years.

I calculate that the tax assessment in that scenario, for just one individual on a modest £30 a month contract is an incredible £1,600.

I would suggest that for even one employee that is a harsh result for the business and if it applies to more than one person then the amount will quickly add up.

The moral of the story is clearly to review mobile contracts and ensure that they are in the appropriate party’s name before HMRC perform their own review.

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