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Where Taxpayers and Advisers Meet
HMRC Accepts Defeat over the Rise of the Smartphone and Tax Refunds May be Due
21/02/2012, by Lee Sharpe, Tax News - Business Tax
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HM Revenue & Customs has announced that it now accepts that smartphones 'count' as ordinary mobile telephones, for the purposes of employment taxes and benefits in kind. Whilst the huge growth in smartphone sales in today's market makes such distinctions seem meaningless, HMRC is effectively saying that they now accept smartphones were always eligible as normal mobile phones for tax purposes.

This means that employers who followed the strict guidelines previously published by HMRC and reported benefits in kind on the provision of smartphones should now be able to claim repayments of Class 1A NICs. Likewise employees who were taxed on a smartphone benefit in kind will ordinarily be able to claim an Income Tax repayment. (For more information on how to claim a refund, please see the link at the bottom).

Previously, HMRC had differentiated between ordinary mobile telephones, and smartphones or PDAs: for several years the provision by an employer of an ordinary mobile phone to an employee has been exempt from a 'benefit in kind' tax charge whilst a PDA or smartphone was not automatically exemptHMRC felt that PDAs (and by implication smartphones) were more akin to computers than phones, and seemed loth to allow employees to have a tax-free computer from their employer. (Although it was not always thus).

HMRC's guidance emphasises that the device's "primary purpose" had to be that of a mobile telephone,  and their 2011 Benefits and Expenses Booklet 480 said,

"A Personal Digital Assistant, such as a BlackBerry, combines the functions of a mobile phone with many of the functions associated with a computer. Therefore a BlackBerry is not a mobile phone for the purposes of the exemption in Section 319 ITEPA."

This seems to be quite a narrow interpretation of that section. ITEPA 2003 s 319 says that a mobile telephone includes " ... wireless telegraphy apparatus designed or adapted for the purpose of transmitting and receiving spoken messages and connected to a public telecommunication system".

To be fair to HMRC, they have always allowed that PDAs and smartphones were potentially exempt by virtue of the more general provision at ITEPA 2003 s 316 - although that section does effectively require that the asset or service provided must be for the sole purpose of the employment and that any private use be insignificant.

Given the huge increase in market share of smartphones in relation to overall mobile sales, it is perhaps not surprising that HMRC has given up trying to distinguish between them and ordinary mobile phones. Very few phones now have the limited functionality which HMRC originally required.

There is a grudging admission that HMRC is playing catch-up: 

"Instances where [employers will have reported a taxable employee benefit] will be rare as in many cases employers and tax advisers have assumed that smartphones are already covered by the mobile phones exemption."

However, HMRC has not yet given up entirely:

"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."

That last sentence in particular suggests that HMRC hasn't really embraced the Digital Age. Or, more importantly, appreciated the thrust of the legislation underpinning ITEPA 2003 s 319: VOIP is increasingly common on smartphones as a cheap way to make calls and - just like Internet access generally - still uses "wireless telegraphy apparatus" so the distinction is pointless - at least when you're trying to make a phone call!

For more information, please see Revenue & Customs Brief 02/12 - Employment Income - Definition of Mobile Phone (Treatment of Smartphones)

About The Author

Lee is TaxationWeb's Articles & News Editor and writes for TaxationWeb. He is a Chartered Tax Adviser with experience of advising individuals and owner-managed businesses over a broad spectrum of tax matters.
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