SE21701 - Benefits: computers: partial exemption: examples

Example I (terms for directors no more favourable)

A seafood distribution company with two directors and twenty other employees provides computers for the directors and five of the employees. All the recipients are allowed to use the computer for private and family purposes. Three of the computers have a market value of £1,500 and have modems. The directors and a senior employee get these because they need to keep in touch by Email. The other four computers have a market value of £1,000 and are provided to the salesforce. The company has a service contract for maintaining the computers and pays a global annual premium of £680. This is broken down to £120 a year each for the more expensive machines and £80 for the cheaper ones.

Exemption is due as follows:

Note that although not all the employees get the same value of equipment there is nothing particular in the terms on which the computers are provided that makes the provision to directors more favourable than the provision to other employees. Exemption is therefore due.

Example 2 (telephone charges not exempt, exemption does not fully cover cash equivalent)

A husband and wife are the sole directors of a scrap metal company. There are no employees. The company rents a yard which has a small lock up office. During the day the husband handles metal in the yard while the wife deals with accounting for cash transactions with buyers and sellers and credit transactions with major suppliers. She keeps track of the stock of metal, cash, bankings and the major suppliers' accounts on a computer in the office. Its market value is £2,000.

She wants her husband to learn how to use a computer so he can help her with the books. The company buys another computer, market value including peripheral equipment and software £2,500, which is kept at the directors' home. Occasionally she uses it for keeping the business records up to date but there is no real need for this, she has everything she needs at the office. The computer at home is mostly used by the husband who realises he needs to be familiar with computers to help in the business, and by their children who use it to play games and surf the net.

The company pays £120 a year on a maintenance contract for the computer at home, £120 line rental on a telephone line for connecting the computer to the Internet, £500 in call charges on that line and £100 to an Internet service for the right to use that service provider's equipment, search engines and other software.

The computer in the office is exempt from Schedule E. This is because although it is a benefit provided to the wife it is provided on premises occupied by the employer and used by her in the performance of her duties ( SE21601).

The telephone line rental and call charges are taxable benefits. Their cash equivalent totals £120 + £500 = £620. Neither can be exempt under the computer equipment exemption because of the exclusion of telephones from the definition of computer equipment.

The other items all have the potential to be within the exemption. The calculation of the cash equivalent is:

It is most unlikely that any deduction for necessary expenses ( SE21210 and SE21626) will be due in respect of the limited business use of the computer at home. This is because the "necessary" test ( SE31645) will rule out relief.

Example 3 (terms for directors more favourable)

A company which designs and manufactures microcomputers for special purposes has two directors and ten employees. The employees are provided with computers and software for use at home. The directors accept that the employees are likely to use the computers to write the occasional letter and prepare Christmas card mailing lists, so they do not formally prohibit all private use. However use of the machines for idle game playing is discouraged and loading software other than that supplied or approved by the company, or downloading files from the Internet, poses such a danger of introducing viruses into the company's systems that it is prohibited on pain of dismissal.

One of the directors has a hobby interest in oceanography and weather systems and he couples this with his work interest in computing by writing software to perform mathematical analysis of data about ocean currents and weather. There is no intention that the company will develop this commercially though he thinks he may be able to develop software which he personally can sell. The analysis needs a lot of computing power and the company builds and lends to him a special computer with parallel processors which enable the calculations to be done in minutes rather than days. The machine cost £8,000 to build and has a market value of £5,000.

No £500 exemption is due. When all the facts are considered it is clear that the terms on which the computer is provided to the director differ from, and are more favourable than, the terms on which they are provided to employees.

Example 4 (exemption does not fully cover cash equivalent, computer necessary to perform duties, part private use)

A magazine publishing company employs graphic designers who do much of their work at home. They are provided with computers, scanners, colour laser printers and software with a market value of £6,000. All the employees occasionally use the equipment for private purposes and one is able to demonstrate that it is used for work

80% of the time and privately 20% of the time. At no time is the equipment used concurrently for work and private purposes. That employee pays Schedule E tax as follows:

From the cash equivalent the employee can claim a deduction in respect of the use of the benefit for performing his duties ( SE21626 and SE31661). The amount of that deduction is 80% of £700 = £560. The employee would therefore pay tax on a net benefit of £140.