West Midland SMEs are being warned that loaning a computer to an employee for use at home is no longer a 'tax-free perk' and incurs VAT.

Under the 2004 Home Computer Initiative many employers lent employees computers as part of the Government's drive to improve employees' IT literacy. The idea was that businesses would benefit from the improved IT skills of employees.

Pete Collins, employment associate at lawyers Manby Steward Bowdler, said: "HM Customs and Excise decided that any VAT incurred could be deducted in full because the employer would benefit. Any personal use of the computer would be minimal so there was no VAT adjustment for private use."

Unfortunately, HMRC has reviewed the VAT position and employers now have to consider why the computer is being provided to the employee to determine the level of VAT to be claimed.

Mr Collins said "As a result of this review employers will have to apportion VAT according to private as opposed to business use. Companies will have to put systems in place to measure this. Employers will only be able to claim full VAT recovery if they can prove a computer is essential for an employee to carry out his or her work.

"It could get more complicated as there is discussion that the ruling could be applied to any device connected to a computer."