Mark Francois (Shadow Minister, Treasury; Rayleigh, Conservative)

May I, too, welcome you to the Chair, Mr. O’Hara? The most controversial part of chapter 5 of the Bill, which deals with personal taxation, is undoubtedly clause 61, which paves the way for the abolition of the popular home computing initiative, a decision that is still very much to be regretted, but that we dealt with in some detail in the Committee of the whole House. Clause 60 is an associated though less immediately controversial issue. Essentially, it seeks to limit to one phone any tax reallocation of mobile phone use by an employer to an employee. It was covered by the same regulatory impact assessment as clause 61, to which I shall refer shortly.

There are two areas in which it would be helpful to have clarification from the Paymaster General on the intended operation of the clause.

To begin with, there appears to be a residual ambiguity as to the permitted degree of personal use—if any—of the one mobile phone to which the clause refers, and on the tax implications, because there are differences between what is said in the Bill and the explanatory notes on the one hand and in the subsequent regulatory impact assessment on the other.

On clause 61, the Government now say that people who are provided by their employer with a computer at home for business purposes will not be taxed on that computer as a benefit in kind, provided that any personal use of it is not significant. After debate, the Paymaster General offered to consult employers to define the term “not significant,” and I understand that that work is ongoing. However, I should like to know the parallel position under clause 60 in relation to mobile phones that are provided for business purposes.

The explanatory notes initially implied that there was to be no attempt to regulate the extent of such private use for the purposes of identifying a taxable benefit in kind. Paragraph 1 of the notes states, fairly clearly:

“This clause replaces the exemption for employer provided mobile telephones in section 319 Income Tax (Earnings and Pensions) Act 2003. It provides that no tax will be due when employers make only one mobile telephone available for private use and removes the availability to family or household tax-free.”

Paragraph 16 of the notes then says:

“The clause re-focuses the relief provided by the exemption, keeping administrative burdens for employers to a minimum where a mobile telephone is provided for business use and private use is also made.”

Furthermore, when one looks at the clause, one sees that new section 319(1) to be inserted in the Income Tax (Earnings and Pensions) Act 2003 says:

“No liability to income tax arises by virtue of section 62 (general definition of earnings) or Chapter 10 of Part 3 (taxable benefits: residual liability to charge) in respect of the provision of one mobile telephone for an employee without any transfer of property in it.”

So far, so good. However, the associated regulatory impact assessment, which was signed by the Paymaster General on 24 April—a fortnight or so after the changes made by clause 60 came into effect—observes that there are now some 50 million mobile phones in use in the United Kingdom. That is a very large number. The RIA does not attempt to break it down into phones provided primarily for business purposes and those that are for personal purposes, but at paragraph 41 it states:

“Employers will still be able to benefit from the deregulatory objectives behind the mobile phone exemption when only one mobile telephone is made available for private use or where a mobile phone is provided for business purposes and there is insignificant private use.”

However, paragraph 23 of the RIA, entitled “Implementation and Delivery Issues,” states more explicitly:

“Where additional mobile phones are made available for private use or where private use of a business mobile phone is significant it will be liable to a tax charge and Class 1A National Insurance in the same way as any other benefit in kind.”

So a literal reading of the RIA implies that there could be a benefit in kind in certain circumstances of provision of an individual mobile phone. If that were the case, employers might be expected to define for taxation purposes the amount of personal use of that mobile phone, even if they had provided only that one mobile phone to their employee. There might be a considerable compliance burden for companies that sought legitimately to remain on the right side of the line. The regulatory impact assessment acknowledges the potential compliance burden at paragraph 54:

“Compliance costs would arise from employers having to report to HMRC the benefits in kind that would be subject to tax and Class 1A NICs under these proposals, the potential need for records to be kept and the implementation of extra coding notices for employees.”

The length of that process might be considerable. For example, if a mobile phone were provided primarily for business use, employees and employers might have to spend hours trawling through mobile phone bills to identify incidental private use and establish whether it was significant. That decision would in itself be subjective, and it might lead to unnecessary disputes between employers and employees, and then, indeed, employers and HM Revenue and Customs.

If, as is often the case in this day and age, the employer paid a fixed monthly amount and call charges were free up to a certain limit, how would “significant” be determined? How should the employee quantify the additional cost to reimburse his or her employer in order to avoid a tax charge? Put another way, assuming that the employee does not or cannot  identify the cost of private calls, how should the employer compute the taxable amount in order to remain on the right side of the line?

The Institute of Chartered Accountants in England and Wales considered the issue, and it made the following point about this clause:

“If significant private use of mobile telephones is to be taxable once again, we suggest that there should be a flat rate charge, as was the case before it was abolished from 6 April 1999. This proposal will avoid the need for complex benefit calculations resulting from the availability of a wide variety of payment plans.”

For clarification, will the Paymaster General confirm exactly how the new regime is intended to operate? Specifically, will there be a tax charge for a benefit in kind even on one employer-provided mobile phone if the private use of such a phone is deemed significant? Can we expect new guidelines to define insignificant as opposed to significant personal use? We will be given guidelines in relation to home computers, for instance, and paragraph 73 of the regulatory impact assessment implies that guidelines will apply to both.

If we are going to receive guidelines relating to mobile phones, when are they likely to be made available, given that the measure is already supposed to be in force? Who will be involved in drawing up such guidelines, and what consultation, if any, will take place? There appears to be a dichotomy, so will the Paymaster General clarify the issue for the Committee before we allow the clause to stand part of the Bill?

There is an associated point that requires clarification. It concerns BlackBerrys. They are becoming increasingly common in business—and in this place, too. I thought that in making this point, I had best declare a personal interest, if only for safety’s sake. In a post-Budget note on employer-provided mobile telephones, Deloitte and Touche called for clarification of the status of BlackBerrys, as did KPMG. In addition, in a recent tax alert note on the subject, Ernst and Young pointed out the following:

“No guidance has been given from HM Revenue and Customs to employers about how to determine whether a device’s primary purpose is a mobile phone or whether the mobile phone capability should be considered a secondary feature.”

Subsection (4) of proposed new section 319 defines a mobile telephone as “telephone apparatus”, which means,

“wireless telegraphy apparatus designed or adapted for the primary purpose of transmitting and receiving spoken messages and used in connection with a public electronic communications service.”

The key phrase is “primary purpose”. BlackBerrys usually also encompass a mobile telephone capability. However, arguably, they are not designed primarily for that purpose. Therefore, they appear to be in a grey area as they can also be used for transmitting messages such as e-mail and for obtaining information from the internet. The more modern BlackBerrys allow us to surf the world wide web.

Brooks Newmark (Braintree, Conservative)

I must confess to having an interest. Although I do not own a BlackBerry, I own a Palm Treo, which has the same impact as a BlackBerry. My hon. Friend makes an excellent point about non-verbal communication. What may be helpful is the fact that all my bills, and I believe all of his, when they are telephonic are itemised. Therefore, any tax  inspector of the Revenue can see clearly what is for business and what is for personal use. Perhaps we should be considering that as well, because those devices are for both written and verbal communication.

Mark Francois (Shadow Minister, Treasury; Rayleigh, Conservative)

I am grateful to my hon. Friend for that intervention, which serves to amplify my point. BlackBerrys have a multi-functionality. The question for tax purposes is, which functionality will be taxed in that instance? Will the Paymaster General confirm whether the clause will define BlackBerrys as computers rather than mobile phones? If so, it would presumably be possible to have one of each without incurring an additional tax charge as a benefit in kind. Following the associated changes to clause 61, that is assuming that any personal use of the BlackBerry, if it were a computer, is deemed not to be significant.

To clear up the ambiguity, can the Paymaster General clarify exactly how clause 60 is intended to operate in practice? Are there any circumstances in which there could still be a tax benefit in kind for a single employer-provided mobile phone? If so, what are they? Can the right hon. Lady say how BlackBerrys are to be categorised for the purposes of the Bill? Are they excluded from clause 60? If so, they will presumably be dealt with under clause 61 instead. It would be helpful if that matter were clarified, too.

Jeremy Wright (Rugby & Kenilworth, Conservative)

I wish to ask the Paymaster General to clarify one matter. I am sure that she will easily be able to answer my question. Under the old system, multiple mobile phones could be provided by the employer without incurring tax liability. If replacement multiple phones are provided now by an employer, will they come under the old regime or will they be caught by the new regime?

Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)

I am in some difficulty in answering the questions that I have been asked because most of them have nothing to do with clause 60. I shall deal first with that clause. I shall then take your guidance, Mr. O’Hara, on the other points.

Clause 60 replaces the tax exemption that prior to6 April enabled an employer to make available a mobile phone for private use. Business use is separate. It is in a different part of the tax Acts and is not affected by the clause. The mobile phone is for private use of the employee and, as it turns out, members of the employee’s family and household. The clause will give exemption to one mobile phone per employee for private use. There is no need for significant private use, business use and so on. The mobile phone is for private use and always was.

The clause limits the tax exemption so that only one mobile phone can be made available to each employee tax free, but it excludes the employee’s family and household. The clause also makes it easier for employers to provide that mobile phone, as prior to 6 April, a tax charge arose on the provision of a non-cash voucher or credit token to make mobile phones available for private use. They were often used by smaller employers who found it easier to give employees credit tokens to go to a mobile phone shop and buy the relevant phone. The  clause has nothing to do with requirements in respect of business and business use, which are quite different.

The hon. Member for Rayleigh (Mr. Francois) asked one other relevant question, about BlackBerrys and personal digital assistants. Last year, sustained lobbying from the home computer initiative providers and accountants persuaded the HMRC that the functions of the new generation of PDAs and BlackBerrys made it more appropriate to include them in the exemption under computer equipment. Therefore, they are not covered by the clause.

The hon. Gentleman raised the matter of a commitment to upgrading mobile phones every 18 months or where there is an interaction with the Consumer Credit Acts and arrangements should have been made on transfer at the time. If an employer and an employee have entered into a salary sacrifice arrangement that entitles the employee to the private use of a mobile phone—I am talking about private use only—and extends for more than 18 months, the agreement is covered by the consumer credit legislation. Guidance has already been given and if employers found themselves in difficulty, the HMRC would take that into consideration and so would the Office of Fair Trading.

There is always discussion about which side of 6 April the arrangement was entered into. The employer will have to show the HMRC that, prior to 6 April 2006, it was in the process of setting up a scheme that involved making mobile phones available to its employees for private use, and the arrangement would then roll forward; it is quite a well used measure. My advice is that in each case if there is a renewal or if arrangements have been entered into but have not quite been completed, they will be covered as long as the employer can demonstrate that to the HMRC.

The questions about significant private use and business use are not relevant to the clause, but I can answer them briefly if you think it would be helpful, Mr. O’Hara. I can tell the hon. Gentleman that in respect of business mobile phones, where an employer makes more than one mobile phone available—for example, if an employee is travelling and goes into different world tariff zones, it is easier to have more than mobile phone—there is a rule, which has been in force since before 1999, that where there was significant private use, or where the private use was insignificant but the phone was given for business purposes, the private use would not be counted and would not be taxed. As a result of changes to clause 61, there have been requests for a restatement in guidance of what was operational before.

Discussions are taking place between the HMRC and a number of different organisations such as the CBI, the Institute of Chartered Accountants in England and Wales and the Chartered Institute of Taxation. That will lead to published guidance so that there is no doubt about the provision of business phones for private use. The provision of a private phone, tax free, simply for private use was supposed to help employers with the divide between business and private use. This provision is about a mobile phone given to an employee for private use tax free and the clause simply restricts it to one phone per employee instead of the entire family. That is entirely appropriate.

Mark Francois (Shadow Minister, Treasury; Rayleigh, Conservative)

I am grateful to the Paymaster General for that clarification. There appears to have been some  confusion, including among some professional accounting firms, about what the Government were trying to do. The whole purpose of going through the Bill clause by clause is to clarify those matters. I am glad that we have had an opportunity to do that this morning.

I do not want to transgress the border between clauses 60 and 61, but as the Paymaster General referred to the guidelines on the definition of clause 61, which will affect the definition of significant personal use of a business mobile phone—I understand the distinction that she made—could I with your indulgence, Mr. O’Hara, ask her to give us some idea of when she believes those discussions will be complete and when those guidelines will be made available? All members of the Committee would be interested in an approximate timing if she can provide that before we move on to the next clause.

Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)

The guidance will be produced as soon as it is possible. First, there is the consultation. Then the draft guidance will be issued to ensure that it covers all the points made and then it will be released. I hope that those who have made comments will have time to look at the guidance before it is issued. There is always a difficult balance to strike here. If people want to comment on the draft they will have to do so speedily because it is intended that the guidance will be ready by the end of July so that it runs in sync with the Bill and its final stages. I hope that hon. Members will appreciate that if we get a last-minute comment, we will need to look at it very carefully.