Revenue & Customs Brief 02/12

Employment income - definition of mobile phone (treatment of smartphones)

Readership

This Revenue & Customs Brief is relevant to those employers that have:

  • provided just one smartphone to their employees without transfer of ownership and
  • treated that smartphone as a device that falls outside the meaning of 'mobile phone' for the purposes of the exemption in section 319 Income Tax (Earnings and Pensions) Act 2003 ('ITEPA 2003') and
  • included entries in form P11D and form P11D(b) for the benefit of the availability and use of that smartphone and for the corresponding Class 1A NIC liability (or included the benefit in a PAYE Settlement Agreement)

Instances where all three conditions are satisfied will be rare as in many cases employers and tax advisers have assumed that smartphones are already covered by the mobile phones exemption. Where employers have been aware of HM Revenue & Customs' (HMRC's) view that smartphones are not 'mobile phones', employers are likely to have provided such devices in circumstances covered by the separate exemption in section 316 ITEPA 2003 for supplies and services used in employment duties. This exemption applies to certain categories of asset where the sole purpose for providing it is to enable the employee to perform the duties of the job, provided that private use is not significant. (For more technical detail on this exemption see the Employment Income Manual at EIM21611.)

HMRC is today announcing a change of view on the interpretation of section 319(4) ITEPA 2003, which deals with the definition of the term 'telephone apparatus', which is used in the definition of 'mobile phone' in section 319(2). Section 319 ITEPA provides an exemption from Income Tax in respect of the provision of one mobile phone per employee without any transfer of ownership.

Background

Since the emergence of smartphones into the consumer mobile phones market from around late 2007 onwards, HMRC has considered that they were to be treated in the same way as set out in its previously published guidance about personal digital assistants ('PDAs'). This view was based on the understanding that smartphones were not devices that are designed or adapted for the primary purpose of transmitting and receiving spoken messages and used in connection with a public electronic communications service.

Change of view

HMRC now considers that its application of the legislation to smartphones is incorrect.

HMRC now accepts that smartphones satisfy the conditions to qualify as 'mobile phones'. Developments in PDAs following the penetration of smartphones into consumer markets from late 2007 onwards mean that many modern consumer PDAs are now also likely to be smartphones. But this will not apply to devices that are solely PDAs.

It should be noted that this view applies to smartphones as configured and understood at the start of 2012. This is an area of rapidly changing technology and HMRC cannot be certain about the application of the definition of 'mobile phone' to new forms of smartphone.

It should also be noted that there are many types of devices that have telephone functionality which do not qualify as mobile phones. The definition does not cover apparatus that is designed or adapted for a primary purpose other than transmitting or receiving spoken messages, even if that apparatus is also capable of being used in this way.

Examples of apparatus that does not fall within the definition of a mobile phone include satellite navigation devices, devices that are solely PDAs and tablet and laptop computers. In general, devices that use Voice Over Internet Protocol ('VOIP') systems to make and receive phone calls will not satisfy the primary purpose test.

Guidance

As a result of the change of view set out above, the guidance at EIM21701, EIM21779 and EIM21780 is being updated. Amendments are also being made to the Expenses and Benefits A-Z and will be made in due course to booklet 480.

What to do if you are affected by this Brief

Employers

1. Where you provide a smartphone in 2011-12, treat it in the same way as any other mobile phone. Only include a benefit on form P11D for any mobile phones/smartphones that are either over and above the first one provided to the employee or that are provided to a member of the employee’s family or household rather than to the employee personally.

2. If you provided a smartphone for 2010-11 and years back to 2007-08 and the three bulleted conditions listed under 'Readership' are satisfied, you may wish to seek repayment of the Class 1A National Insurance contributions (NICs) liability in relation to the benefit of the smartphone.

3. You can do this by writing to HMRC with the following information for the tax years affected:

  • the names and National Insurance numbers of the affected employees
  • for each affected employee, confirmation of the smartphone benefit reported on form P11D
  • details of the make and model of smartphone
  • the calculation of the benefit
  • confirmation of where this benefit was included in form P11D
  • the amount of Class 1A NICs payable as shown on the original P11D(b)
  • the revised amount of Class 1A NICs now payable after deducting the Class 1A NICs originally due on smartphones.

Please include a brief covering letter, with the heading 'Employment income: mobile phones exemption - smartphones' and send the information to:

Customer Operations Employer Office
BP4102
Chillingham House
Benton Park View
Newcastle Upon Tyne
NE98 1ZZ

4. HMRC will also use this information to identify any repayments of Income Tax that may be due to employees. In order that HMRC can act on this information and make any Income Tax repayments to your employees for 2007-2008 please provide the information in respect of 2007-2008 to HMRC by 31 July 2012. The time limits for repayment of Class 1A NICs liability are later, so if you comply with the dates for Income Tax, you will be within any time limits for claiming a refund of Class 1A NICs.

5. If you identify any affected employees for 2010-11, please check to see if you are also providing a form P11D for them for 2011-12.

  • If you do provide a P11D for 2011-12 and you complete it as explained in paragraph 1 above, you don’t need to provide HMRC with any additional information about smartphone provision in 2011-12.
  • HMRC will automatically sort out 2011-12 and deal with any revision to the 2012-13 tax code when HMRC process 2011-12 P11Ds that you have completed on this basis.

6. However, if there are any affected employees for 2010-11 for whom the change of view on smartphones means you will not need to send a P11D for 2011-12 as there are now no benefits or expenses to report on it please send a separate list of the names and employees affected. If you wish to complete forms P11D for other employees first, please send this information as soon as possible after you submit forms P11D for 2011-12. This will enable HMRC to sort out the position for 2011-12 and deal with any revision to the 2012-13 tax code. Please include a brief covering letter, with the heading 'Employment income: smartphones - no P11D for 2011-12' and send the information to the address shown in paragraph 3 above.

7. Exceptionally, where the provision of a smartphone had been included in a PAYE Settlement Agreement for any of the tax years stated and the three bulleted conditions listed under 'Readership' are satisfied you should write to:

HMRC Local Compliance
Specialist Employer Compliance
Dukes Court
Dukes Street
Woking
Surrey
GU12 5XR

You should include with your repayment claim:

  • confirmation that the three conditions were satisfied
  • a copy of form P626 for each year where the provision of this benefit had been included
  • a breakdown of the original calculation of tax and Class 1B NICs due for each year
  • a detailed calculation of the amount to be refunded.

8. If you need help before writing to HMRC, please phone the Employer Helpline on 08457 143 143.

Employees

1. If you think you may be affected by this Brief, you will need to check the position very carefully. Firstly you need to consider whether your employer treated smartphones differently to mobile phones and secondly gain confirmation that any smartphone provided was reported to HMRC by your employer as a taxable benefit. In most instances an employer-provided smartphone will not have been reported to HMRC as a taxable benefit. If you have been taxed on the benefit of the use of an employer-provided smartphone, this may be because the exemption (which can only cover one device) had already been used up by another mobile phone. In this case, the tax charge is correct, the change of view about smartphones has no effect and you will not be able to make a claim for repayment.

2. If you consider that you are due a repayment you should contact your employer to ask them to supply HMRC with the information detailed in the 'Employers' section of this Brief.

3. If your employer or former employer does not supply the required information to HMRC, you will be able to contact HMRC direct and will need to demonstrate all the following:

  • you were provided with just one smartphone without transfer of ownership to you
  • your employer treated that smartphone as a device that falls outside the meaning of 'mobile phone' for the purposes of the exemption in section 319 Income Tax (Earnings and Pensions) Act 2003 ('ITEPA 2003')
  • the smartphone was not treated as being covered by the separate exemption for certain supplies and services used in employment duties
  • your employer included an entry in form P11D for the benefit of the availability and use of that smartphone
  • that you have paid tax on the benefit

4. You will also need to provide the information listed in the second, third, fourth and fifth bullets in paragraph 3 under the heading 'Employers' above. You may need to ask your employer/former employer to provide you with some of this information.

5. The time limit for claiming repayment of overpaid income tax is four years from the last day of the relevant tax year. If you think you are due a repayment for 2007-2008, you will need to contact HMRC and provide the information for that year as soon as possible. HMRC will still consider claims made for 2007-2008 if they are made on or before 31 July 2012. For 2008-2009 the time limit is 5 April 2013 and for 2009-10 it is 5 April 2014.

6. You should not need to contact HMRC about 2011-12 as HMRC has asked employers to make sure that if the three conditions are satisfied that they do not include the smartphone on your P11D for this year. As a consequence HMRC will automatically review the 2011-12 tax position after the end of the tax year when HMRC process your P11D information.

7. If you need advice or help, please look at the details for Income Tax enquiries for employees on the 'Contact us' page on the HMRC website.

Issued: 20 February 2012