The future for mobile phones

Key points

  • There remains a certain level of scepticism around the salary sacrifice of mobile phones.
  • The boundaries of what constitutes a mobile phone for tax purposes are not clear as technology evolves and handsets become more complicated.
  • Some employers believe the tax breaks behind such schemes could eventually be scrapped as they were with the home computing initiative.

The number of people walking down the street or sat on the train with mobile phones glued to their ears shows just what a popular accessory handsets have become. Given this trend for staying in touch, you would expect more employers to offer a mobile phone through salary sacrifice than they do.

According to Employee Benefits/Towers Perrin Flexible Benefits Research 2006, only 17% of respondents offered mobile phones through salary sacrifice or flexible benefits, compared to 81% which offered childcare vouchers.

This apparent lack of interest among employers in mobile phones may be partly due to confusion over what is covered by the tax exemption. The rules state that one mobile phone can be provided to a director or employee for private use and is exempt. One way of offering staff the option of this tax-free perk is through salary sacrifice, providing them and the employer with National Insurance (NI) savings.

However, there are fears that the definition of what constitutes a mobile phone is being stretched too far and that the Treasury could axe the tax break just as it did with the home computing initiative (HCI) when employees started to buy plasma televisions.

Pat Higgins, managing director at mobile phone provider Sourcecom, says: "Unfortunately the boundaries aren’t clear because technology is changing all the time. I can take a picture and surf the web on my phone, it basically does what a laptop did five years ago."

Grey areas

The current definition given by HMRC of what constitutes a mobile phone is "anything that may be used to gain access to, or the use of, a public electronic communications service".

Another grey area exists around the number of phones provided to employees. This may stem from a decision by the Chancellor in the Budget earlier this year to tighten up the rules around mobile phones by imposing a limit of one phone per employee that can be applied for private use in order to prevent individuals taking several and passing them to family members through salary sacrifice schemes. So confusion can arise where an employee is also entitled to tax-free mobile phones solely for business use.

Providers insist that as long as employers can prove that any mobile phones given by the company are primarily for corporate use, and not private use, they are tax exempt. Russell Horton, managing director at Flexphone, says: "As long as the company’s mobile [phone] policy makes it clear that corporate mobiles are only given to staff who need them to perform their role, and hence their significant use is for business purposes, then this fits the [HMRC’s] guidance."

A HMRC spokesman spells out the department’s position. "Essentially if the employee’s company phone is for business use and any private use is not significant then they can also participate in a scheme to get a second mobile phone for their own private use."

In order to keep things simple, insurance firm Norwich Union, is only offering a salary sacrifice scheme for mobile phones for private use to staff who do not already have a company phone.

Sandy Wilson, head of reward at the insurer, says: "We believe that tax-free mobile phones would appeal to a large number of employees, but we wanted to make the scheme as simple as possible."

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Although providers tell employers that offering mobile phones through salary sacrifice is a worthwhile benefit there continues to be a niggling doubt that the tax breaks behind such schemes could eventually be scrapped as they were with HCI.

Steve Herbert, senior consultant at Truestone Employee Benefits, says: "In three or four years [mobile phones] will probably go the same way [as HCI], but for now it is an opportunity not to be missed."