Some of your employees are using their own IT equipment while working at home during the coronavirus pandemic. You want to pay them an allowance to compensate them for the business use. Do you have to put it through the payroll and deduct PAYE tax and NI?
Modern working practices
It’s common for employees who use computers in their day-to-day work to use their home computers for this when out of the office. While HMRC allows employers to pay a tax and NI-free allowance to compensate employees, including directors, for homeworking costs, this isn’t intended to cover the cost of IT equipment. As with all payments from employer to employee there are tax consequences.
Expenses, PAYE tax and NI
When you pay for or reimburse an expense incurred by an employee or director you don’t have to deduct PAYE tax or NI if the employee would have been entitled to a tax deduction had they and not you met the cost. Typically this is the position where the expense was for a business journey or was wholly and exclusively incurred by the employee in the course of doing their job. On the other hand, if the expense has a private element that can’t be accurately identified you must deduct PAYE tax and NI. This seems to apply to payments you make to compensate an employee for use of their personally owned computers etc.
Tip. HMRC will accept employers can make tax and NI-free payments to compensate employees for the cost of maintaining equipment used for their job if the business element is identifiable. You should therefore ask your employees to submit an expenses claim for the business use of the equipment, e.g. “Estimated business use of computer equipment 30%”, and then show the corresponding proportion of the VAT-inclusive cost of their computer etc.
Employee’s tax position
Where an employee owns equipment which they use for work, they are entitled to claim a capital allowance (CA) for the cost or market value of the equipment when they started to use it for work, proportionate to business use.
Example. Brianna works for Acom Ltd. In January 2020 she bought home IT equipment costing £2,400 (including VAT) primarily for use by her family, but she now uses this for her job. She expects the computer to last four years before she replaces it and that the percentage of work-related use compared with the total over that period is 30%. She claims £720 from Acom. Brianna can claim a tax deduction for 2019/20 of £720 (£2,400 x 30%), but must reduce this by the payment she receives from Acom, i.e. £720. Therefore, her tax position is neutral. She doesn’t have to claim a tax deduction or declare the money she received from Acom to HMRC.
Varying business and private use
Let’s assume that the business use of the equipment varies from Brianna’s 30% projection. For example, she stops using the IT equipment altogether in a year’s time. What are the tax consequences? The good news is that because of the quirky way that the CAs rules work the change in usage has no effect. Therefore, neither Brianna nor Acom needs to review the tax treatment of the £720.
You can compensate an employee tax and NI free as long as it is proportionate to the business use of the equipment. Employees should estimate the business use as a proportion of the total and apply this to the cost of the equipment. This is the amount you can pay them without deducting tax or NI.