Whether it’s a laptop, calculator or piece of machinery, if you use personally owned equipment in the workplace what tax relief are you entitled to?
Different expenses, different rules
You’re probably familiar with, or have at least heard of, the “wholly, exclusively and necessarily” rule in the context of tax relief for employment-related expenses. The effect of the rule is to deny tax relief for expenses if there’s so much as a hint of a non-business use. This rule doesn’t apply in the same way to capital expenses such as the cost of equipment which you use in your job.
Capital expenditure
The rule for capital expenditure on equipment used for work, e.g. a PC, home office furniture, etc. is less rigorous than for general expenses. The “wholly and exclusively” condition doesn’t apply. Instead, to qualify for tax relief a capital expense need only be necessarily incurred for the purpose of your job.
Example. Gareth is the finance director of Acom Ltd. The PC he uses was bought primarily for personal use. It cost Gareth £1,320 including VAT. However, it’s soon apparent that he’s spending far more time using it for work than for pleasure. Gareth estimates his business use at 80%. Because he can’t do his job without the PC, in other words it’s necessary that he has it, he claims a tax deduction for £1,056 (£1,320 x 80%). This seems reasonable and in line with what the rules say. The trouble is HMRC has in the past tried to put its own spin on what the “necessarily” condition means in practice.
Trap. Some tax inspectors argue that the “necessarily” condition is only met for capital expenditure if the director or employee who incurred it was explicitly instructed to do so by their employer. They expect there to be something in the company staff policy or employment contract to that effect. This interpretation twists what the legislation actually says.
What the law says and means
The “necessarily” condition relates to the nature of the job and not instructions by an employer to make a purchase. The necessity for something is usually implied by the type of work. For example, if your job is to monitor an IT network and you’re on call 24 hours a day, the need for a PC or similar is undoubtedly necessary as is something to sit on while working. Therefore, tax relief can be claimed for a proportionate part of the cost of any equipment you can’t do your job without.
Trap. Some inspectors use an alternative argument to refuse claims for tax relief. They argue that only if there’s a requirement (a necessity) to work away from your firm’s premises would you need to use personally owned equipment to do your job.
Tip. You can snuff out HMRC’s argument by making it your firm’s policy that if an employee’s job results in them working from home, and the company doesn’t provide equipment, the individual must pay for their own if it’s needed to do the work.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.