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TAX FEATURE: Tax deductions for training courses ' Part 1. By Nichola Ross Martin

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26th May 2006
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The self-employed, particularly accountants regularly attend work related training courses. In this article, Inspired by a query posted in Any Answers, Nichola Ross Martin looks at training courses in terms of tax treatment as revenue/capital from the perspective of the self-employed and employer claiming a deduction against profits. In a second article to be published next week, she will look at the employees and the restrictions that they have in claiming deductions for training expenses against their income from employment.

Deductions for the self-employed
HMRC views about training course for the self-employed is set out in Tax Bulletin 1G, which became Revenue Interpretation (RI) 1. It says: "Where attendance at a course is intended to give business proprietors new expertise, knowledge or skills which they lack, it brings into existence an intangible asset which is of enduring benefit to the business. We take the view that the expenditure is therefore of a capital nature, and deduction is prohibited by ICTA88/S74 (f) (now s.33 ITTOIA 2005).

"On the other hand, where attendance is merely to update expertise etc. which proprietors already possess, the expenditure is normally regarded as revenue expenditure and will be deductible if it satisfies the `wholly and exclusively for the purposes of the trade' test in ICTA88/S74 (a) (now s.34 ITTOIA 2005)."

Revenue v capital
In short it is initially a question of looking at the facts, and taking exactly the same approach in considering whether the cost is revenue or capital as one would for any other type of cost. Those who have done full professional exams in the past will have covered a broad range of topics in those exams, and any CPD course will be regarding as updating expertise, knowledge or skills that have already been created. In terms of repairs and renewals, the original professional exams equate to the original installation of the window, and the CPD training is akin to renewing the window with double glazing. A new window is not created, the existing window is merely enhanced.

If a deduction is challenged,it is case of presenting precise details about the courses and qualifications undertaken already, coupled with skills learnt after the event, and then looking at the course in question to ascertain which parts of it are imparting totally new skills and which part represents topping up of existing skills.

Wholly and exclusively
Just because an expense has a duality of purpose does not automatically mean that it should all be disallowed. Look at the primary objective in incurring the expense, if there is a secondary personal benefit it depends on the extent of that benefit. There is no reason why an expense should not be apportioned if you can prove the main purpose and intention was to provide training for the trade or profession.

MBAs, academic courses and new qualifications
HMRC's Business Income Manual at para. 35660 says its staff should disallow any expenditure that provides new expertise or knowledge (particularly where it brings into existence a recognised qualification like an MBA). I have a problem with this, because I have met a couple of people who have done an MBA because they were able to obtain the qualification with relative ease due to the skills that they learnt in their professions, and consequently were able to say hand on heart that they had learnt very little from the MBA itself. I know of a least one person who studied for tax exams but did not take them, as although the course work was good (basically a akin to a crash dose of CPE), there was no benefit in obtaining the paper qualification.

Given to that you can be awarded certain qualifications for your achievements in a certain field without doing any exams at all, it would seem that there is a difference between the course itself and the piece of paper giving the qualification at the end. Each case must be decided purely on its own merits, and it is clear that in some cases BIM35660 should be taken with a pinch of salt.

Deductions for Employers
An employer will likewise have to define tax treatment of staff training for the purposes of his own accounts. Although the question of revenue/capital is identical ' still s.33, the wholly and exclusively' rule in s.34 can present some problems, particularly if you are trying to claim cost of a training course for yourself and you are a director/employee of your own company.

HMRC express their views on 'expenditure on staff training and development' in RI 168, where they say that 'except in cases where the employee has some link with the employer outside the employment itself, the disallowance of expenditure by an employer on staff training and development will be extremely unusual indeed'.

RI 168 was published in TB27 in 1997, which probably explains why the above statement seems so benevolent, how attitudes have changed!
In upbeat fashion, it adds that the Revenue find it difficult to imagine circumstances likely to occur in practice where the benefit which the employer obtains from the expenditure by way of better trained staff is of such a substantial and enduring nature that the expenditure can be viewed as incurred on an identifiable capital asset. The Revenue would not regard the cost of training staff to use new equipment or systems of a capital nature as itself capital either.

Director/employees
In the case for owner/managers, according to the Revenue there is obviously a much greater chance that expenditure may have been incurred not, or not wholly, for business purposes but to provide the employee with some personal benefit. In that case the business purpose is not the exclusive purpose of the expenditure, and it is disallowed under what is now s.34. They cite 'an extreme example', where no deduction will be allowed 'for the educational costs of the business proprietor's son who is employed in the business during university holidays. In such cases it is often helpful to ask whether the expenditure would have been incurred on an otherwise unconnected employee doing the same job.'

In a small or family company there may not be any other employees doing the same job, and so the whole question of whether expenditure is tainted with some personal benefit for the owner/manager hits exactly the same wall that has been put in place to try and disallow company contributions into director's pension schemes since A-day. In my mind this means that one has to prove that the training course has to be one that is commonly on offer to all operatives in that particular trade or profession in general, rather than looking at one isolated company. On balance this means that there may be little scope for claiming the costs of MBAs, academic courses and new qualifications for directors, as these sort of courses are hardly the norm for employees in general.

Nichola Ross Martin

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By Gone Sailing
03rd Jun 2014 16:23

Part 2 ?? And Update

Anyone have a link to Part 2

And is this excellent guide in need of an update in the light of recent cases?

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By cisono
29th Jan 2015 12:06

I am not an accountant, so I would really appreciate if someone could please clarify what this means in terms of self-assessment for a sole trader?

You said:

"HMRC views about training course for the self-employed is set out in Tax Bulletin 1G, which became Revenue Interpretation (RI) 1. It says: "Where attendance at a course is intended to give business proprietors new expertise, knowledge or skills which they lack, it brings into existence an intangible asset which is of enduring benefit to the business. We take the view that the expenditure is therefore of a capital nature, and deduction is prohibited by ICTA88/S74 (f) (now s.33 ITTOIA 2005)."

OK so training costs relating to new expertise/knowledge or skills is not a deductable expense. The expenditure is of a CAPITAL NATURE - does it mean it could be classed a capital allowance (like a van for instance)?

Please note that all the new qualifications the owner/sole-trader is acquiring fall within career development and the field of practice of the sole-trader is by definiton "holistic".

Thank you.

 

 

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