Can limited companies claim ChatGPT Plus or MS 365 Copilot, as a business expense?

With Microsoft due to charge the equivalent of £23 per user per month, to access Artificial Intelligence features Copilot in its business version of Microsoft 365, it’s not just ChatGPT Plus that contractors are asking whether they can expense via their limited company, writes chartered accountant Graham Jenner of Jenner & Co.

When the cost of software is deductible…

For the cost to be tax-deductible, it should, ideally, be “wholly” and “exclusively” for the purpose of the company’s business. If that is the case for you with ChatGPT Plus or Copilot (assuming the trial and promised fee for Microsoft enterprise customers is expanded to the UK), then, yes, the software will be wholly deductible from taxable profits of your limited company.

Note -- the expense does not need to be a “necessary” cost of the business. Much of the use of such AI products will (currently) be just for preparing content for reports, emails and the like, which you would otherwise wholly prepare yourself. So, in the case of ChatGPT Plus or Copilot, the use of the product or service is not “necessary”, but it might well improve your efficiency.

Don’t have an AI job or contract?

No, me neither! But don’t worry, that doesn’t mean your PSC is prohibited from expensing either of these items.

Put another way, your limited company does not need to have a contract for services in place which requires the use of such services for it to be allowable in the eyes of HMRC as a business expense.

Even if ChatGPT Plus, for example, turns out to be of little or no use to your contractor business, or worse still makes the business less efficient, it would still be wholly tax deductible, as long as it is “wholly” and “exclusively” for the business.

Personally using ChatGPT Plus, MS 365 Copilot, or other language learning tools

Let’s face it, while you are playing around with the latest AI tool or software, trying to find out what these services are capable of, you are likely to be using them personally.

From the “wholly” and “exclusively” description above, it might appear that tax relief cannot be obtained where there is some personal use. However, the HMRC rules here are not as much of an ‘all or nothing’ as it may first appear.

Why? Well, firstly, a cost could be apportioned between the business use and the personal use. If only the business use is put through the limited company, then the part which the business incurs is wholly and exclusively for the business.

Secondly, if the business contracts for the service but agrees with you that you can use the service for personal use as well as business use, the personal element is then wholly and exclusively for the business. So, the company has agreed, as part of your ‘pay’ package, to provide you with the benefit of using the service.

Business-to-business contract, it’s key

The question now moves to whether or not that is a ‘taxable benefit’ to you.

One small but important point.

The contract for the AI software should be between your company and the software provider -- not between you, personally and the provider -- otherwise there can be potential issues with VAT recovery, and the fact that the company is paying for something on your behalf.

Taxable benefit for private usage?

If the personal use of the AI service is merely incidental to the business use, then HMRC accepts that there is no taxable benefit. In fact, this is a non-technical way of saying that the value of the taxable benefit is the ‘incremental cost’ of the personal use. Where personal use is incidental, there is no incremental cost.

Even where the personal use is significant, provided there is some business use, the incremental cost of the personal use is likely to be nil – the software’s monthly subscription will be a fixed price. Where there is an incremental cost as a result of the personal use e.g. the company contracts for additional user-licences, which you make available to, say, your family, there is a clear and distinct incremental cost which would be the value of the taxable benefit.

Finally, don’t get hung up on the tax relief

While it is good to know that Copilot’s potential cost in the UK could be tax deductible, or ChatGPT Plus’s cost could be tax deductible, let’s not forget that all that means is that the net cost after tax relief is what the company really incurs.

For example, let’s imagine a new AI tool launches at £50 per month. So that’s £50 a month less 19% for corporation tax, costing a net £40.50 per month. Is that effective discount of £8.50 per month, really the deciding factor in whether the company needs or wants to sign up to this new AI service? Probably not.

For this shiny new AI offering and like some of the Artificial Intelligence tools doing the rounds today, I suspect that many contractor PSCs will sign-up only to find that it isn’t as useful to them as they first thought! But again, if it’s wholly and exclusively for business, then it’s your pride not HMRC that'll be your issue.