Spring Statement 2018: self-funded work-related training
Chancellor Philip Hammond announced a consultation on plans to extend the existing tax relief available for self-funded work-related training by employees and the self-employed, as part of the government’s focus on creating an environment for individuals to develop their skills to boost productivity in the UK
13 Mar 2018
The consultation is intended to provide insight into how the government can best learn the lessons from previous initiatives, such as vocational training tax relief in the 1990s, and tax deductions for training in other countries.
It will look at how to design an extension to the existing tax relief that focuses on supporting good quality training for those wanting to upskill or retrain, particularly those who want or need to change career, but which also prevents misuse on recreational activities, is sustainable for the public finances, and is simple to understand and administer.
Currently, most employers fund their employees’ work-related training, although sometimes the employee might pay for the training themselves and subsequently have the costs reimbursed. Employers can deduct this expenditure as a business expense and employees do not pay tax or National Insurance contributions on the benefit because there is a wide statutory exemption for payments or reimbursements of expenditure on the provision of work-related training.
Expenditure by someone who is self-employed is generally allowable in computing profits for the purposes of tax and National Insurance contributions provided it is wholly and exclusively for the purposes of the business, and is not capital expenditure.
A training course to update expertise, knowledge or skills already possessed will normally be regarded as revenue expenditure. However, expenditure on a training course for a business owner that is intended to provide new expertise, knowledge or skills brings into existence an intangible asset, which will have an enduring benefit for the business. It is therefore of a capital nature so does not qualify for tax relief. The consultation asks for views on addressing this.
The consultation document points out that vocational training tax relief was introduced in the early 1990s and withdrawn in 2001. Around 200,000 individuals claimed the relief each year but it proved very difficult to create a system that delivered the intention behind the rules. For example, more than a quarter of the £36m tax relief given in 1997 to 1998 related to claims for flying and diving. Horse riding and cookery courses were also popular, with the relief criticised for funding expensive hobbies.
It also says HMRC has to deal with attempts to stretch the definition of work-related training in order to claim a deduction for other activities. Examples include businesses taking their employees on holidays all over the world in the name of training and research because they visited locations in the destinations with some relevance to the trade; or businesses in the food supply industry claiming they are sampling products at restaurants for research purposes when they are simply going out to lunch or dinner.
As a result, HMRC says any tax changes for employees and the self-employed must be closely defined so that individuals are clear about what they can and cannot claim. Misuse and error create risks to the Exchequer and other costs to taxpayers because of the increased compliance activity required by HMRC.
The design of any extension should also ensure relief is not available for expenditure on recreational activities or other personal purposes so that the scope for misuse of the relief is minimised; be sustainable and affordable for the public finances; and be as simple as possible to understand and administer so that take-up is maximised and errors are minimised.
The government says it has an open mind on whether tax relief and/or tax credits would be the most appropriate approach to achieving these objectives. It is also open to other alternative approaches to supporting self-funded work-related training through the tax system if they meet these objectives and design criteria.
For example, some other countries have an annual cap on the level of expenditure on training that can qualify for a deduction and the government will need to consider this option carefully. A £500 cap would provide a basic rate taxpayer with £100 in income tax relief even if the individual paid a total of £1,000 for the training course.
The consultation closes on 8 June.
Report by Pat Sweet