Input tax on computers for homeworking
Your business has agreed that some employees will become homeworkers and has provided laptops to assist them. What VAT issues must you consider with these laptops? John Craig discusses the implications.
If you provide your employees with a computer and there is no business use, the tax you pay to the supplier is not input tax and cannot be claimed. In such cases, you will capitalise the VAT-inclusive cost of the machine to your balance sheet.
Business use would include dealing with work related emails, the usage does not have to be job specific, e.g. producing a set of accounts or writing a project report.
Part private use
You might accept (and allow) that your employee will also use the computer for private use as well as for business. In such cases, an apportionment of input tax should be made at the time of purchase in order to reflect the likely split of business and private use. The method adopted is not prescribed in law and HMRC confirms that it should be “kept simple”.
Make sure you keep a written record of how you apportion your input tax in case it is queried by HMRC on a compliance visit. You can use any method of calculation as long as it is fair and reasonable.
If your business is partly exempt, then a further input tax restriction will be required if the computer is used partly or wholly for exempt activities. The private/business split is completely separate to partial exemption issues. The main difference is that the method of partial exemption calculation is prescribed in law, your business must adopt the standard method (based on taxable and exempt sales) unless you have agreed a special method in writing with HMRC.
If you make a charge to your employees for private use of their computers, perhaps through a salary deduction, then input tax can be fully claimed on the purchase of the machine. However, you must account for output tax on the salary deductions.
Don’t forget that salary deductions are VAT inclusive, i.e. output tax is 1/6 of the amount charged to the employee and not 20%.
It is possible that you will not know the percentage use of the computer between business and private when it is purchased, or which employee it will be allocated to within your business. In such cases, you can fully claim input tax (subject to the normal rules) but must account for output tax on each VAT return based on the private use in that period. This is known as the Lennartz mechanism and calculations are based on a five-year life of the asset, i.e. 20 VAT quarters.
Selling the computer
If you apportion input tax on the purchase of your computer between business and private use, you will only need to account for output tax on the business percentage when you sell the asset.
75% input tax was claimed on the purchase of a computer you are now selling for £1,000 plus VAT, then output tax of £150 will be charged to your customer, i.e. £1,000 x 20% x 75%.
Use a consistent method for apportioning input tax on computers that are partly used by your employees for private purposes. Consider whether it is better to use the Lennartz method and fully claim input tax when you buy the computer, accounting for output tax on private use when you complete each VAT return.