VAT on home computers

In 1999 the government introduced an exemption which allowed employers to lend a computer to their employees tax free even if there was only private use of the computer. In 2004, the government launched the Home Computing Initiative (HCI), which encouraged employers and employees to take advantage of the exemption.

HMRC considered the VAT position at that time and, although there would generally be some private use of the computer under HCI agreements, agreed that as long as there was some business use, any VAT incurred could be deducted in full.

The income tax exemption was withdrawn for new HCI agreements entered into from 6 April 2006 onwards and HMRC have now reviewed the VAT position. From 13 August 2007 onwards, HMRC’s previous policy to allow full VAT recovery without any adjustment for private use was withdrawn (subject to some transitional provisions for existing arrangements).

Does this mean that businesses cannot recover the full amount of VAT? They may still be able to do so but they must consider why the computer is being provided to the employee. Businesses will be able to make a full VAT reclaim where the computer is necessary for the employee to carry out their duties and any private use is insignificant. 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 is in line with the approach taken for income tax.

Businesses that cannot demonstrate that it is necessary to provide an employee with a computer in order to carry out their job will only be able to reclaim a reasonable proportion of the VAT incurred.