Contractor’s Question: As the director of my own limited company, I’d like to know – can my PSC provide a smartwatch to me, its director?
Expert’s Answer: The short answer to your question is ‘yes.’
But there may be tax and National Insurance implications, either for the company or the director.
What’s behind your question, I sense, is really another question – and it’s this:
Can your limited company treat the cost of the smartwatch as tax deductible?
Any cost the company incurs that it is wholly and exclusively for the purpose of its trade is tax-deductible (i.e. deductible from income when calculating taxable profits).
While there may be a personal element, you have to look at why the company is providing the smartwatch. It is, effectively, part of the overall remuneration package of the director and that package is wholly and exclusively for the purpose of the company’s trade. Hence, the cost is tax-deductible for the company.
Is there a taxable benefit on the director?
Assets provided for the use of a director are, generally, taxable as a benefit.
However, certain assets are either exempt or treated in a specific way. Mobile phones, for example, are exempt, if only one mobile phone or SIM card is provided to the director. (N.B. If more than one mobile/SIM is provided, then one of them will be exempt and the other will be treated like a general asset. I address this more fully later on in this answer.
Of course, a smartwatch isn’t a mobile phone. Nor is it a tablet or computer! General purpose smartwatches can be thought of as a support device for your phone -- that you happen to keep on your wrist.
So when is a smartwatch not taxable?
Although unlikely, a smartwatch provided to the director which is wholly for the purpose of the employment with no personal use, would not be taxable on the director.
Smartwatches, however, have functions that the director could use which have nothing to do with the employment!
There is an exemption for assets with work-related benefits, which applies if there is “no significant private use.”
What do the taxman’s rules say about significant private use?
HMRC states: “Significant private use should not be based on the time spent on different uses. It should be based on your employee’s duties and the need for them to have the equipment or services provided so they can do their job”.
HMRC seem to accept that, in situations where, say, a laptop is necessary for the employee to do their job, the fact that they might also use it for private use does not result in a taxable benefit, irrespective of the amount of private use.
The thinking seems to be that the main purpose of providing the laptop is to enable the job to be done. Any use the individual may be able to make of the laptop is merely incidental to that main purpose.
Is the Revenue’s expenses framework keeping up with technology?
With the exception of speedily introduced special rules that were designed for those workers working from home due to the Covid 19 pandemic, legislation and HMRC’s guidance often lag behind rapidly changing technology and its usage in business.
Smartwatches have been around for many years. At a push, one could argue that the first Smartwatch was the “Plus Four Wristlet Route Indicator” in 1927! With more certainty, we can say watches with datalinks to a computer have been around since the 1980s, so you would hope that, despite no specific guidance being issued by HMRC on smartwatches, some common sense would prevail.
What’s the answer to this smartwatch expenses question, in a nutshell?
The bottom line? Where you can demonstrate that there is some compelling business reason for the director to have the use of the smartwatch, then any private use could be considered insignificant, and so then no taxable benefit arises.
Otherwise, it is likely that the smartwatch is only a ‘nice to have’ and so is primarily provided as a personal benefit of the director.
What about specialist smartwatches?
Specialist smartwatches, such as hiking, diving or flying smartwatches may, for directors and employees of companies with a business connected to the specialty of the smartwatch, be easier to demonstrate the business need for.
On the other hand, a diving smartwatch for, say, a systems analyst, whose hobby is diving, is going to, fairly clearly, fall within the ‘taxable benefit’ category.
How much is the value of the benefit?
If there is a benefit, it is calculated at 20% of the market value of the smartwatch when first made available to the director.
A taxable benefit arises if the asset is available for private use, irrespective of whether or not it is used for private use.
There may be a proportionate reduction in the taxable benefit for days that the asset is ‘not available.’
When is an asset not available?
Interestingly, an asset is not available (according to HMRC) on a day that the employee “uses the asset in the performance of the duties of the employment and does not use the asset otherwise than in the performance of the duties of the employment.” I.e. on that day, they only use it in the performance of the duties of employment.
With a smartwatch, proving that it was only used for the purposes of the employment on a particular day may be tricky!
Sometimes it is simply not worth the aggravation!
With the cost of smartwatches typically being under £500 and so the taxable benefit being less than £100 p/a (being 20%), is it really worth the aggravation of trying to argue that there was only employment use on certain days?
If you feel the need for a smartwatch, and cannot justify that any private use is insignificant compared with the business use, it will be much simpler to buy it personally and not have the aggravation of working out and reporting the taxable benefit.
On the other hand…
Where we are talking about an asset with a significantly higher value – perhaps, as in one of the examples provided on HMRC’s website, a jet with a market value of £20.8 million (with a taxable benefit £416,000 per annum!), then it might be worth a bit of effort to reduce the benefit. That said, those contractors contemplating providing a private jet through their PSC better contact me direct!
The expert was chartered accountant Graham Jenner, founder of tax and accounting advisory Jenner & Co.
