Tax for UK SMEs: Mobile Phone Expenses

The generally accepted rules:

The tax treatment for mobile phone costs can be confusing. Many companies are unclear about whether work phones costs are taxed as a benefit-in-kind and if they need to be reported as a benefit-in-kind on form P11D. 

It is commonly accepted that the company can provide an employee with one phone and/or sim card and that would be tax-free, including any personal uses in addition to business calls.

Things get tricky depending on whether the contract is under the company’s name or the employee’s name. This expense has caused problems for many employers, and many accountants would advise following these general rules:

1. If the employer provides an employee with one mobile phone, there is no tax or NIC to pay.
2. If the employer pays the bill on the employee’s behalf, the employer must report the benefit on the employee’s P11D and deduct Class 1 NICs via the payroll.
3. If the employer reimburses the cost of the employee’s mobile phone, the employer must deduct tax under PAYE and Class 1 NICs through the payroll.

However, in this article we want to dig deeper and see what different HMRC resources actually say about work-related mobile phone expenses.

On the gov.uk website:

HMRC says on the gov.uk website that：

Here it states very clearly that the contract must be between the employer and the supplier in order for the costs to be exempt. This is consistent with the general advice 1 shown above and would be the best approach for most companies.

Dispensations and exemptions:

However, if you carry on reading HMRC then mentions that some phone expenses that used to be dispensations are now covered by "exemptions". 

HMRC says that you do not have to report some routine employee expenses. The expenses covered by the exemption includes:

To qualify for the exemption, you must either:

• paying a flat rate to your employee - this must be either a benchmark rate or a special (‘bespoke’) rate approved by HMRC.
• paying back the employee’s actual costs.

So, under the dispensation exemptions, provided that the phone cost is clearly for business use, and the company reimburses the employee based on actual cost, the expense should not attract any tax or national insurance liabilities for both the employer and employee. In most cases however, there would be a mixture of personal and business calls all covered within the free minutes provided by the monthly tariff (and therefore not solely and exclusively for business use), which is why it is generally advisable to follow the general rules and ensure the contract is between the company and the supplier to avoid any doubts. 

Guidance 480 on expenses:

It should also be mentioned that in Chapter 22 of Guidance 480, HMRC also states that for "one mobile phone given to an employee" that "any line rental or the cost of any private calls for that phone paid for by the employer" there is no charge to tax unless they can be converted into money. It does not actually mention anything about who signs the contract with the supplier (for example, there may be a situation where the employer sets a budget and instructs the employee to choose a suitable tariff for business use, then reimburse the employee the line rental cost on a monthly basis). So, you may also want to refer to guidance 480. 

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If you provide more than one phone to an employee

One of the phones is exempt from paying and reporting, but any other phones count as assets. 

Note: It is not clear on the gov.uk website whether the following sections below refer to the second phone only or if they apply to the first phone as well. Hence, the general advice is to assume that they apply to the first phone as well, and sign the contract under the company's name so that the employee do not get taxed for their first work phone.

If your employee arranges the phone but you pay the supplier

You must:

• report the cost on form P11D
• pay Class 1 National Insurance through payroll

The employee uses their own phone and you reimburse them

If you only reimburse the monthly phone tariff, deduct and pay Class 1 National Insurance and PAYE tax through payroll. There are no additional reporting requirements.

Private call charges over the monthly phone tariff

Deduct and pay Class 1 National Insurance and PAYE tax through payroll. There are no additional reporting requirements.

Business call charges over the monthly phone tariff

You must report the amount on form P11D. You don’t have to deduct and pay any tax or National Insurance.

Your employee has a ‘pay as you go’ mobile and you reimburse them for business calls

You must report the amount on form P11D. You don’t have to deduct and pay any tax or National Insurance.

Conclusion

As you can see from above, one can come to a different conclusion depending on which HMRC resource you rely on. It seems that HMRC may interpret the rules in quite a strict way and many companies were affected by this, resulting in many online forums discussing this issue. It is definitely an area that HMRC should streamline and simplify. One would hope that a common sense approach would be adopted in the future, which is that the tariff cost of one work phone should be exempt, regardless of the specific arrangement of the contract with the supplier. This would reduce the administrative burden on employers, allow more flexibility, and improve compliance as the rules are then easier to understand.

The above is only a discussion pointing you to useful references and HMRC resources. We do not give tax advice on this blog. If in any doubt, please contact HMRC or discuss your specific queries with a tax specialist.

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