Your business is about to update its IT equipment for employees and directors who work from home. There’s a suggestion that the employees should personally own the equipment as this could be more tax efficient. Is this right?
Supplies made to staff
As a VAT-registered business when you supply goods or services to customers for consideration (payment of some type) you have to charge VAT unless the supplies are exempt or outside the scope of the tax. VAT also applies to business gifts, that is the transfer of goods for no consideration. These rules also apply to supplies made to your employees or the company’s directors.
VAT on supplies to staff
If you buy the equipment and allow an employee/director to use it for private purposes or keep it permanently, it’s a supply for VAT purposes.
Example 1. Acom Ltd has several employees who need IT equipment for their work. It buys the equipment and immediately transfers ownership to the employees. Acom can reclaim the VAT it paid on the purchases. However, the transfer to the employees is a supply and so Acom must account for VAT on the value of the equipment at the time of the transfer. HMRC deems this to be equal to the purchase price and so the VAT Acom reclaimed is matched by the amount it must account for. The VAT position is therefore neutral.
Delayed transfer
However, as we’ve already mentioned, if you lend equipment to an employee/director and permit them to use it for private purposes it also counts as a supply but this can be more VAT efficient than an immediate transfer.
Tip. Where there will be private use of equipment by employees it’s more VAT efficient for you to lend equipment to your employees/directors initially and transfer ownership later than to buy the equipment and immediately give it to your staff.
Example 2. Acom buys IT equipment costing £9,000 and reclaims the VAT of £1,500. It lends the equipment to its employees and after two years transfers ownership to them. Private use of the equipment by the employees while Acom owns it counts as a supply of services and VAT has to be accounted for to the extent of the employees’ personal use. In this example personal use is likely to be small, Acom estimates it at 10%. Over two years the IT equipment depreciates by 60% of original cost, i.e. £4,500.
| VAT claimable | VAT payable | |
|---|---|---|
| VAT reclaimed on IT | £1500.00 | |
| VAT on private use * | £90.00 | |
| VAT on transfer ** | £600.00 | |
| Totals | £1500.00 | £690.00 |
* Depreciation £4,500 x private use rate 10% x VAT 20%.
** Transfer value £3,000 x VAT 20%.
VAT summary
Comparing the VAT position in example 1 (immediate transfer of equipment to the employees) to that in example 2 (transfer of equipment after use), there’s a clear advantage to the latter. In our example the saving is £810 but the amount of VAT saving depends on the amount of private use and the rate of depreciation. The lower the former and the greater the latter the more VAT saving there is.