Mobile phones can be offered to staff tax efficiently via salary sacrifice or flexible benefits arrangements, so Kate Donovan looks at the mechanics of setting up a scheme
Tax-efficient mobile phones can be offered as a benefit via salary sacrifice arrangements, thanks to a tax break which was introduced in the Finance Act 1999. But in the 2006 budget, the Chancellor clarified the conditions around the benefit by stating that only one mobile phone per employee was eligible for the tax exemption.
In return for the use of a mobile phone supplied by their employer, employees agree to a reduction in their gross annual salary. The cost of the mobile phone is taken out of employees’ salary on a monthly basis over an agreed term which is commonly 12 months’ long, but can also be extended to 18 months.
Employers can run the scheme either in-house or through an external provider. As the cost is deducted from employees’ pre-tax salary, employers can benefit from national insurance (NI) savings of up to 12.8% per participating employee. Therefore, the extent of employee take up has a significant impact on the employer savings that are up for grabs.
Employees also make savings on a combination of tax and NI contributions, typically of either 33% or 41% on their mobile phone. Russell Horton, managing director at Flexphone, explains: “For example, a typical base-rate tax payer would save £11.55 a month on a £35 mobile phone package through the scheme. A higher-rate tax payer would save £14.35 per month on the same package value.”
To comply with tax regulations, the phone must be owned by the employer and then loaned to the employee. “Hence the service has to be delivered as a business mobile phone contract and billed centrally. However, the tax break allows the phone to be purely for personal use, so it is an employer-provided benefit and the employee is electing a package, and agreeing terms and conditions with the employer, with the mobile phone benefit specialist managing the service on the employer’s behalf,” adds Horton.
Dealing with the overspend
The cost of using a mobile phone can vary from month to month, so a net pay deduction can be used to deal with the overspend, while some providers manage a direct debit collection service.
The arrangement selected by the employer usually allows employees to choose from a wide range of phones; accessories and price plans.
Pat Higgins managing director at provider Sourcecom, says: “The scheme must be fully compliant with [HM Revenue & Customs’] rules as well as the Office of Fair Trading and current UK employment law. We ensure that all these requirements are met.”
There has been some confusion over what exactly constitutes a mobile phone under the terms of the tax regulations. HMRC’s guidance is very clear that a mobile phone is apparatus designed, or adapted for, the primary purpose of transmitting and receiving spoken messages and used in connection with a public electronics communication service. Guidance also clearly states that personal digital assistants and BlackBerrys do not constitute mobile phones, as these devices now have additional functions more commonly associated with a computer, so are not eligible for the tax break.
Employers can also offer tax-efficient mobile phones through a flexible benefits scheme. For those who wish to do so, some providers will integrate mobile phones within a benefits platform without an additional cost.
Product file: Mobile phones
What is a mobile phone as a benefit?
Employers can offer mobile phones to their employees for personal use via salary sacrifice, thanks to a tax break introduced in the Finance Act 1999. Employers benefit from national insurance (NI) savings while employees qualify for tax and NI savings. Mobile phone benefits providers can manage the relationships with mobile phone companies on behalf of employers and ensure schemes comply with HMRC rules.
Where can employers get more information?
For guidelines on offering mobile phones as a benefit and conditions around the tax break, visit: www.hmrc.gov.uk/manuals/ eimanual/EIM21779.htm†