It is tempting to have your company pay personal phone bills, but this article will alert you to some of the pitfalls. On the face of it you might think you save money on a cheaper personal contract. However after considering the VAT, income tax and National Insurance you might be better off on a business tariff.
Whenever an employer pays a bill in respect of goods or services provided for the use of an employee there could be a liability for Class 1 National Insurance Contributions (NICs). If your company pays personal bills, this is deemed to be settling a pecuniary liability and any payments will be treated as salary and subject to tax and NICs.
Liability will depend upon who enters into the contract with the party supplying the goods or services. You need therefore to establish exactly what the particular contractual arrangements are in order to determine who has entered into the contract. It is not enough to rely upon identifying who the bill is addressed to since this only concerns who is to pay the bill. The address on the bill does not have any bearing on who contracted for the supply/provision of the goods or services.
If an employee enters into the contract and the employer pays the bill, the employer is simply meeting the employee’s debt. The amount involved is earnings for Class 1 NICs purposes.
The company can only recover VAT with a VAT invoice. Personal phone bills do not normally have VAT details, and in any case the bill is not in the name of the company so this also undermines recovering VAT.
Some employees use their own mobile phone to make business calls. A deduction can be permitted for the actual cost, necessarily incurred, of telephone calls made by the employee in the performance of the duties of the employment.
Mobile phone tariffs can be complex and it is not always easy to determine the actual cost of a business call. Some tariffs include a certain amount of free time in the rental charge. In these cases there may be no cost to be deducted.
If the employee can satisfy HMRC that a mobile phone which is personally provided and paid for is used wholly, exclusively and necessarily in the performance of the duties of their employment, the employee will be able to claim tax relief for the cost. There will be no NICs relief though.
If the employee also has another personal contract, and can explain why their employer is not prepared to provide a mobile phone when one is needed (and the employer confirms this if HMRC approaches them, as they sometimes do) will help demonstrate that the conditions for tax relief are met.
Without there being another personal phone, HMRC will argue that the ‘wholly and exclusively’ test is not met, because the employee can receive personal calls. It does not matter that there is no marginal cost for this or that no such calls are in fact received. Now that itemised bills are unusual, it would also be difficult for the employee to show what the cost of business use was.
Employees can only claim a tax deduction for expenses incurred “wholly, exclusively and necessarily in the performance of the duties of the employment“.
No deduction should be permitted for broadband internet access where the employee is able to use the internet for non-business purposes.
Normally, no deduction should be permitted for any part of the rental or standing charge for a telephone installed at the employee’s home. The case of Lucas v Cattell (48TC353) provides authority for not allowing a deduction for telephone line rental. This is because the telephone line can be used for both business and private calls and so no part of the line rental is exclusively incurred in performing the duties of the employment.
A benefit counts as earnings under Section 62 ITEPA 2003 if it is money’s worth. Money’s worth includes things that are of direct monetary value to the employee. This includes where you have your company pay personal mobile phone bills.
An example of this is where the employer pays a debt that the employee owes to a third party. This is often called the pecuniary liability principle. The employer’s payment is of direct monetary value to the employee because he or she no longer has to pay that amount of money to the third party. It therefore counts as money’s worth under Section 62(3)(a) ITEPA 2003. It will be taxable as employment earnings and must be reported through payroll.
An employer discharges an employee’s debt when he or she pays a bill for goods or services direct which in law is the liability of the employee. The employer bears the employee’s pecuniary liability. It does not matter for tax purposes whether the employer makes the payment voluntarily or under a contract.
For example, if an employee has signed the application form for the supply of electricity or gas to her home, the employee is the customer and she will be the person who is billed. If the employer pays the bills for the employee the employer is discharging the employee’s debt.
To avoid any problems with having your company pay personal phone bills either:
The benefit of option 1 is that any personal use is tax free and does not incur NICs. This only applies to the first phone provided. In the event that more than one phone is provided to an employee (or their family) tax charges will apply.
Alterledger Ltd is registered with the Information Commissioners Office.
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