Lee Sharpe looks at the government consultation on tax relief for training costs.
Tax relief for training expenses is available to both employees and the self-employed. However, the mechanism and the criteria are quite dissimilar. In particular, the current tax regime could become a quite serious obstacle to long-term government strategy.
Current position
In summary:
1) Tax relief for employees is reasonably broad and flexible but is oriented primarily around scenarios where the employer funds or provides the training, rather than where the employee pays for his or her own training.
2) Tax relief for the self-employed is arguably narrower in scope since it is limited to updating and maintaining existing skills, rather than to developing new skills.
Looked at overall, there is a lack of consistency and flexibility; these are difficult to address within the existing legislative framework.
Consultation
Earlier this year, the government launched a consultation on extending tax relief for training, for both employees and the self-employed. It could be argued that a better (or more highly) trained national workforce could be an end in itself but the consultation, sponsored by both HM Treasury and HM Revenue and Customs, suggested:
‘Higher skill levels lead to higher wages and stronger employment prospects, higher productivity and profits for businesses, and stronger growth rates. This, in turn, increases tax revenue for public services.’ It is probably unfair to wonder if the only reason HMRC got on board with the idea of giving away more tax relief was the promise of higher tax revenues in the future.
In particular, the government places emphasis on supporting those needing to ‘retrain’, or to ‘upskill’; to acquire skills/expertise in an entirely new career, or to develop skills substantively beyond current levels while still in the same employment or trade, respectively. Note that developing skills within the same employment or trade – upskilling – goes beyond the mere ‘skill maintenance’ of (2) above.
Employees - currently
The main tax-relieving mechanism for employees is that, when training is paid for by the employer, it does not become a taxable benefit-in-kind assessable on the employee (and with associated National Insurance contributions costs to the employer). Guidance on this can be found in HMRC’s Employment Income manual at EIM01200 and following pages.
The provisions are reasonably broad in scope and can cover updating skills, acquiring entirely new skills relating to the existing employment (such as management skills) or, conceivably, an entirely new career with the current (or a connected) employer that the employee has a realistic chance of taking up. HMRC’s interest is in ensuring that the training is not simply a cover for rewarding an employee, such as a two-hour conference on improving PowerPoint presentation skills, held on a three-week cruise around the Tropics.
As well as ensuring the employee has no taxable benefit-in-kind, an employer will usually have little difficulty in getting a business tax deduction against profits for those training costs – see, for example, HMRC’s Business Income manual at BIM47080.
Employee training – practical aspects
The main problem with the existing regime for employees is that tax relief primarily orients around the employer either providing the training or reimbursing the employee for his or her training costs; either way, it is the employer’s expenditure. It only ‘works’ if the employer is happy to cover the costs. Practically speaking, this will significantly limit the employee’s choice of training/career options, in many cases. (ITEPA 2003, s 250 et seq.)
There are quite niche regimes that cover:
- employer costs of re-training on redundancy and similar; and
- very rarely, for employee costs without reimbursement, where training is an integral component of the contractual duties of the employment.
However, broadly speaking the current tax regime, therefore, will not normally support employees if they want to make significant career changes (basically, anything their current employer would not want to pay for), or if they do not have an employer at the time.
Self-employed - currently
The regime for tax relief for people in business on their own account is deceptively simple, in that it follows the general rule that allows tax relief for an expense only when it is incurred ‘wholly and exclusively’ for the purposes of the trade, etc. (ITTOIA 2005, s 34), and that it must not be capital expenditure (ITTOIA 2005, s 33).
In practice, it is not enough to show the relevance of the training to the trade: it also must not provide ‘an enduring benefit’ to the trade – it must not be capital. That is potentially quite limiting in terms of the substance of the training, relegating it to no more than a skill/knowledge maintenance function.
Examples: Are the costs allowable?
(1) Lee is a tax adviser. He goes on a Finance Act 2018 update course. It keeps his tax-advising knowledge up to date. It is allowable.
(2) Lee goes on a three-week PADI course in the crystal-clear blue waters off the coast of Mexico in order to become a qualified diving instructor. Much as he might wish it were, it’s not relevant to tax advisory services and is not allowable. See also (3).
(3) Lee studies for the Advance Diploma in International Taxation, to extend his existing skillset to advising in relation to the interaction of other regimes with UK taxes. While arguably relevant to his profession, it is a new skill, with a long-term or ‘enduring’ benefit. It is considered capital expenditure and is therefore not allowable.
While the outcome in (2) above might be expected, the fact that a new qualification in the same trade or profession is likely to be disallowed is more of a challenge. HMRC’s position can come as a surprise to some.
There is also a lack of consistency in some respects, in that HMRC will readily allow a business to claim tax relief when paying for an employee to achieve a professional qualification – with (hopefully) an enduring benefit to the employee – while it would not allow tax relief for the same qualification, for the proprietor of the business. HMRC can arguably justify that distinction by saying that, so far as the business is concerned, the newly-qualified employee might leave the business in six months’ time, whereas the self-employed individual’s new qualification affects his or her business for perhaps the rest of their career.
Self-employed training – practical aspects
There is little scope for the self-employed to secure tax relief for the cost of either re-training or upskilling, as above.
Training contracts which try to ‘lock in’ an employee for several years post-qualification could perhaps prevent the business securing a tax deduction that would ordinarily be available in full, and immediately, if HMRC could argue that the benefit was effectively capital.
Government proposals
One of the key proposals is to specifically allow training costs for the self-employed, even when developing new skills, so long as the expenditure remains ‘wholly and exclusively’ for the purposes of the trade (or profession). In other words, while there would still need to be a strong link between the training and the activity which generates profits, the current restriction for capital expenditure would be broken.
Another key proposal being considered is, where a person is acquiring skills, etc., for an entirely new career, that any costs they incur (as employee or as a self-employed person, or unemployed – perhaps because they are training full-time) would be available to be carried forward to set against income from the new trade, profession or employment.
Conclusion
Rightly or wrongly, the government seems to be trying to encourage people to fund more potentially career-changing training (a more flexible workforce) while ensuring that the rules are not so permissive as to ‘open the floodgates’ for tax relief claims for current arrangements such as university degrees – so that tax revenues do not fall as a result. We may well see more definite proposals for how this can be achieved in the 2018 Budget (this article was written before it).
