Can I expense via my limited company a Smartwatch bought for me at Christmas?
Contractor’s Question: I hoped a recent article about putting a Smartwatch on expenses might answer my query, but not quite!
In my situation, I was given a Smartwatch as a Christmas present by my spouse and I’d like to put it through my PSC as a business expense. Please advise.
Expert’s Answer: If you have been gifted a Smartwatch (or any other item), it now belongs to you.
Your question, rephrased
Therefore, you should really be asking:
‘If I already own a Smartwatch, can I expense it through my PSC?’
An asset that is owned by the director and may be of use to the business, or of use to the director in performing their work for the business, could be ‘introduced’ into the business.
While ‘introduced’ is often effected in an informal way, with the value of the asset simply being credited to the Director’s Loan Account with the company, a formal approach should be adopted. That formal approach is especially recommended for higher value items.
The correct way to do this, is to establish the market value of the item, raise an invoice from the director to the company, for that amount, and for the company to pay the director. This provides a clear trail that the ownership has passed from the director to the company.
Tax relief can then be claimed by the company on the amount it has paid for the item, in the normal way (via the Annual Investment Allowance, Capital Allowances or the simpler ‘Cash Basis’ system).
What is ‘market value’?
Mentioned above, ‘market value’ is the fair second-hand value of the asset. For a brand-new asset, its full purchase price might be justified, but otherwise you need to be able to justify the value used.
In future, keeping copies of eBay listings for similar assets might be appropriate.
The risk if the asset is overvalued…
The risk of overvaluing is that, should HMRC look into the value used, they may determine that any amount paid by the company over and above what they consider to be the fair market value would be regarded as salary, and should have tax and national insurance accounted for, on it.
With an asset such as a Smartwatch, the tax and national insurance on an over-valuation may not be too significant, but on higher value items, it would be prudent to gather sufficient evidence to justify the value used.
Where the Smartwatch has been acquired by the director as a gift and then sold to the company, it will not be possible to recover the VAT element of the cost of the Smartwatch, as the director is not VAT-registered.
Where VAT is significant, and the company is VAT-registered, it would be preferable for the company to buy the Smartwatch. And ask the ‘gifter’ to gift something else!
Personal use of the asset by the director
If the director continues to use the Smartwatch personally, to any significant degree, then there could be tax consequences as outlined in my previous article.
However, this will be based on the market value of the asset at the time it is first made available for use, likely to be either the value applied for the purchase (above) or, if there is a delay between the company buying the asset and it being made available for the director’s personal use, some lower figure to reflect the fall in second-hand value over the intervening period.
What about claiming tax relief personally?
With a VAT-registered Personal Service Company (PSC), it would usually work out better for the company to acquire the asset so that the VAT could be recovered.
Where that isn’t appropriate a director who buys equipment, that they have to buy to do their work, can claim tax relief (thanks to the Annual Investment Allowance) on the cost of the equipment.
However, for a gifted asset, no cost has been incurred by the director, on which a claim can be based!
Where a Smartwatch has already been gifted to the director of a PSC, and its use can be justified in the business, transferring it to the company, at its market value, is the only way in which any tax relief can be obtained, though that may be at a market value lower than its original cost.
The expert was Graham Jenner, founder of Jenner & Co, an accountancy firm serving freelancers, contractors and the self-employed.