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HMRC have published Brief 55/07, which covers their revised treatment of VAT incurred on home computers made available by  employers to their employees. This follows the withdrawal of the tax exemption which allowed employers to loan computer equipment to their employees tax free.

Until now, for VAT purposes, HMRC have considered that as long as there was some business use, any VAT incurred on computers could be deducted in full without any adjustment for private use. However, following a review of the Home Computer Initiative (HCI), the direct tax exemption was withdrawn with effect from 6 April 2006. Consequently HMRC have now reviewed the VAT position and published a revised policy.

HMRC’s policy to allow full VAT recovery without any adjustment for private use, in circumstances where there is any business use, is withdrawn from 13 August 2007.

With immediate effect businesses must consider why the computer is being provided to the employee to determine the level of VAT that can be claimed. Businesses will only be able to claim full VAT recovery without any requirement to account for VAT on any private use (subject of course to any restriction in respect of exempt supplies) where the provision of a computer is necessary for the employee to carry out the duties of his employment. In these circumstances HMRC’s view is that it is unlikely that any private use will be significant when compared with the business need for providing the computer in the first place. This mirrors the approach taken for direct tax concerning exemptions for work related benefits in kind where there is no significant private use.

Where a business cannot demonstrate that it is necessary to provide an employee with a computer in order to carry out the duties of his employment then only a portion of the VAT incurred will be recoverable as input tax. HMRC will accept any method of apportioning the VAT incurred as long as the result fairly and reasonably reflects the extent of business use. In order to minimise administrative burdens, businesses may be able to agree a set percentage with HMRC based on a representative period.

Where a business continues to provide a computer under an existing HCI agreement full VAT recovery can continue until the agreement (normally 3 years) has expired. Further information on these transitional provisions is contained in the HMRC Employment Income Manual at para. EIM2699.

It is a basic principle of the VAT system that VAT can only be recovered as input tax where the supply is to the taxable person or business. This means that in circumstances where the supply of the computer is to the employee the business cannot recover the VAT incurred on that supply as input tax.

Links

HMRC: Brief 55/07

HMRC Employment Income Manual at para. EIM2699