Many companies offer their employees various tools of trade to facilitate smooth business operations. These may include stationery, internet connections, and cellphones, often provided free of charge at the employer’s expense. However, it’s important to recognise that these benefits, though convenient, often have tax implications under both PAYE (Pay As You Earn) and VAT (Value-Added Tax).
PAYE implications
The Income Tax Act (ITA) stipulates that “the value of any other benefit or advantage granted to an employee in respect of his or her employment” constitutes employment income subject to PAYE. This includes the personal use of employer-provided cellphones or communication services such as airtime and internet.
Business vs Personal use
Determining the split between business and personal use can be challenging, but it is critical for assessing taxable income. To simplify matters, some businesses implement policies or contracts that establish limits for business-related usage. For example:
- A company may provide employees with P2,000 worth of airtime for business purposes. Any usage above this limit would either be deducted from the employee’s salary or included in their taxable income.
- For employees with unlimited airtime, the value exceeding the business portion must be taxed.
This ensures that employees are only taxed on the personal use portion of their employer-provided benefits.
VAT implications
Fringe benefits provided to employees also carry VAT implications, which are often overlooked but can have significant financial consequences.
Under the VAT Act, when a VAT-registered business provides goods acquired for taxable activities (e.g., airtime or cellphones) for an employee’s personal use, the benefit is treated as a taxable supply. If the company claimed an input VAT deduction upon purchasing the goods, it must account for output VAT on the portion used for personal purposes.
Example
If a company receives a VAT-inclusive Mascom bill of P100,000, and P30,000 of this amount relates to personal use by employees:
- The company can only claim input VAT on P70,000 (the business-use portion).
- Alternatively, if the company claims VAT on the full P100,000, it must declare output VAT of P30,000 for the personal-use portion.
Failing to account for these VAT implications could lead to financial penalties or liabilities for the business.
Key takeaway
Both PAYE and VAT implications should be carefully managed when providing employees with benefits such as cellphones or airtime. Policies should clearly define business-use limits and establish measures for handling excess usage to ensure compliance with tax laws.
Get expert tax guidance
For further assistance, consider joining our free Tax WhatsApp group or exploring our 9 Tax e-books.
To consult or learn more, contact us:
📞 +267 7181 5836
📧 jhore@aupracontax.co.bw
🌐 Visit our website at www.aupracontax.co.bw under the ‘Tax Articles’ tab for more insights.
As always, remember to “pay Caesar what belongs to him!”
