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SMEs are being consulted on changes which will encourage further training of staff.

The government has published Taxation of self-funded work-related training: Consultation on the extension of tax relief for training by employees and the self-employed.

 Changes proposed in the consultation include extending training to upskill, retrain, or gain an approved qualification. The consultation is also a good reminder of the current rules.

Current rules

The meaning of work-related training is defined in s251 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003).

Work related training is defined as training to ‘impart, instill, improve or reinforce any knowledge, skills or personal qualities which are likely to prove useful or better qualify the employee to perform his job or participate in charitable or voluntary activities which are relevant to the employment’.

Examples of work related training include courses to update knowledge and skills, company team building training, CPD training.

Tax treatment differs for employees and the self-employed as different criteria determine whether the costs are tax deductible:

  • employee training costs – whether wholly and necessarily for business
  • self-employed training costs – whether expense is capital or revenue.

Below we summarise the current rules:

Employees

 

Who pays What training For employer For employee
Employer

  • directly
  • by reimbursement to employee
  • Work related for employee; wholly, necessarily for purpose of business, for an employer
  • An identifiable part is for purpose of business
Tax deductible
Employer
  • Retraining of employee anticipated to leave to take new employment
  • Training must be designed to improve or teach new skills which will help the employee find new work
Tax deductible if

  • Employee was employed for at least two years before the course begins, or employment ceases.
  • Retraining lasts no more than two years
  • Employee must leave the employment within two years of finishing the course

 

Not taxable on employee
Employee pays

(not reimbursed by employer)

 

Not wholly and necessarily for business Not tax deductible Not tax deductible for employee, unless proven that the expense was incurred wholly, necessarily and exclusively in performance of his duties

 

Company-funded training for a sole director may be allowable, if the company pays for it, or reimburses the director. If the training relates to gaining a new skill, it is necessary for the company to demonstrate that the skill is relevant to the business already in existence.

Training is not work related when:

  • it funds activities which are of fun, recreational, not related to employment, or entertainment nature
  • it is to reward an employee, usually for achieved performance
  • it is limited to owner-manager and employed family members and not extended to other employees.

Case study

An employed sole director-shareholder attends a training course on property investment carried out by a newly incorporated property investment company.

Is there a business?

Any combination of the below circumstances could indicate the business has started before the purchase of the first property:

  • directors have carried out market research, solicitors, accountants, advisers have been consulted, company has been incorporated and:
  • marketing to source properties is being carried out
  • estate agents have been contacted
  • contact with potential sellers has been established and leads are being followed up
  • quotes have been requested or obtained
  • funding has been secured
  • viewings have taken place.

Subsequent to property purchase:

  • planning permits and licences have been applied for / obtained
  • building contractors have been selected (in case of planned refurbishment, conversion)
  • property is being refurbished, extended, cleaned, and prepared for letting
  • property is put on the market and advertised to tenants
  • viewings are taking place and tenancies secured.

Facts will determine whether a business already exists, therefore the number of hours worked on the business, frequency of the activities, availability of resources and timescales within which those activities have taken place in relation to the timing of the training are likely to have an impact.

Whilst pre-letting expenses are treated as incurred when the letting starts, self-funded training which takes place a long time before the business commences is likely to be too remotely linked to the subsequent business purpose to be deductible in the same way, and instead be considered as incurred for individual benefit. No relief for training expenses incurred is therefore likely.

Is the training exclusively necessarily for business?

Deductibility of training expenses incurred once property is purchased and let is unlikely to be challenged. In this instance any training, as long as there is relevance to specific business needs, is likely to be tax deductible. For example:

  • lease option training for an investor who to date used buy-to-let mortgages as a funding strategy
  • plumbing training for a business owner manager who demonstrates that plumbing skills are necessary to self-manage owned properties and who previously used external contractors
  • interior design training to improve design of existing and future properties, enhance their letting potential and improve return on investment.

The consultation: anticipated changes

Following the conclusion of the consultation in June 2018, tax relief may be extended to training to upskill, retrain, or gain an approved qualification. This is a significant change for the self-employed where such expenditure is currently considered capital in nature and not allowable.

Options currently being considered by the government are:

  • retraining costs for new employments or trades would be carried forwards and could be set against the new income, where earned within a certain timeframe
  • upskilling for self-employed would be changed, such that it is not capital expenditure, or that relief is given for that capital expenditure
  • upskilling for employed would be reviewed to ensure genuine training costs get some form of relief for employees when the cost is not reimbursed.

Article from ACCA In Practice