Buying a mobile phone through your business

Summary: 

What it is: As a director of a limited company, HMRC allows the full cost of your mobile phone and monthly contract to be deducted as a tax allowable expense.

Approximate tax saved: This can save you a small fortune in tax if you were going to buy a phone anyway. In this example, we show how you could save £1,242 in tax. Of course, actual savings will vary depending on your individual circumstances. 

HMRC reference: https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim21779

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Here’s how it works: 

If you’re a director of a limited company, HMRC allows the full cost of your mobile phone and monthly contract to be deducted as a tax allowable expense.

This is all detailed in Employment Income Manual 21779 - however to save you the leg work, we’ve summarised everything for you below. Let’s dive in.

Firstly - all costs of your mobile can be tax deductible. This includes the cost of the phone itself, monthly contract and any extra charges that arise from its use. E.g. for foreign calls not included in your contract. 

Furthermore, all costs for your private calls, text or data charge are even covered too. 

Crucially and unlike many benefits, providing conditions are met, HMRC classifies mobile phones as a tax free benefit. That means there are no benefit in kind charges for you or your business to pay. It’s tax free.

The rules: 

This is an incredible benefit for company owners to take advantage of, however there are 3 key conditions that apply in order to qualify for this. 

1. You can only provide an employee or director with one mobile phone or SIM card. That means you cannot provide a mobile phone to family members tax-free - unless they are employed by your company.

2. The phone and monthly contract must be purchased by your limited company and in your limited company's name. This means the contract must be in your company’s name and both the phone and contract must be paid from your business card or bank account.

3. You must actually buy a mobile phone. Smartphones are included but laptops and tablets are not - even if you can make VOIP calls through them. 

How the tax saving works: 

Given the large costs of mobile phones, the associated tax savings can also be very large. Let’s take a look at the numbers with an example of buying the latest iPhone for £1,200 with a £24 monthly tariff for majority business use. In this example, we'll assume you're a higher rate personal tax payer and your company is VAT-registered and pays the 25% rate of Corporation Tax. Of course, your circumstances may differ, and as such, so might the actual tax rates.

If bought personally: 

If you bought this in your personal name, you cannot claim back any cost as a company expense. 

Therefore the total cost for the phone and 12 months usage if bought personally is £1,488 (£1,200 + £24 x 12 months).

As a higher rate taxpayer, you'll pay a 33.75% tax rate on dividends. Therefore, you’d actually have to earn and issue an extra £2,246 of dividends to pay the phone and contract costs after tax. This is because after issuing £2,246 of dividends, the government would take £746 of income tax, leaving you with the £1,488 needed to buy the phone after tax. So, in effect, the total cost of the phone is £2,246 to you if bought personally.  

Let's look at the saving if you bought the same phone through the company.

If bought through a company: 

To start with, assuming you're on the standard VAT scheme, reclaim all VAT on the phone and monthly tariff. In this example, this means reclaiming £248 of VAT. This is made up from £200 of VAT recovery on the phone, and £4 per month VAT recovery on the monthly tariff - totalling £48 over 12 months.

Put another way, the phone costs £1,000 ex VAT and the tariff costs £20 per month ex VAT. This leaves a total cost excluding VAT of £1,240 which is fully tax deductible.  

Assuming you’re paying corporation tax at 25%, this will give you further tax relief of £310 (£1,240 x 25%).

Adding these VAT and Corporation tax savings together, that’s a total tax saving of £558 on original purchase price of the phone and tariff. 

This gives you an effective cost after tax of just £930:

• Original price: £1,488
• Total tax saving: - £558
• Cost after tax: £930

Now let’s compare this to the £2,246 you would have had to earn to buy this phone personally and you can see the savings are huge:

In fact, that’s a total comparative saving of £1,316 when buying the phone through a business vs buying it personally!

This is why buying a business phone through your limited company is such a great tax saving - and if you’re not doing it, you’re missing a huge tax advantage. 

Common questions 

What if I combine the cost of my phone and tariff together into one monthly contract?

• If you pay for your phone and monthly usage in a combined contract the same rules apply.
• Everything is still fully tax deductible. The same tax savings will just be spread over a longer period of time - until your contract expires and your phone is fully paid off.
   

What if I buy the phone outright and pay for phone usage via pay-as-you-go top ups?

• The rules here are slightly more complicated.
• The cost of the handset would still be a deductible expense for the company, however you can only claim for calls made and data usage for business purposes.
• If asked by HMRC, you would need to be able to produce records to prove that the usage being claimed for was business related.
• This is a real pain, so for this reason it’s far more straightforward and likely more tax efficient to use a monthly contract.

How do you claim this in Mighty? 

Mighty makes this incredibly easy to do. All you'll need to do is categorise purchasing the handset as 'high value equipment' and then any ongoing contract costs as 'telephone', ensuring VAT is also separated if you're VAT registered. That's it - Mighty will then deduct the cost from your taxable profits and reclaim any VAT in your VAT returns.