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Directors training costs

Is PHD research cost tax deductible?

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Hi everyone,

I need your take on this, please.

A company director/employer is undertaking a PHD training and is insisting that the cost must go into the accounts. This is a considerable amount of money. 

I believe it would not qualify as a tax deductible cost if they were self employed, but I cannot find HMRC's guidance when it relates to an employee. 

Does anyone know the rules surrounding this?

Thank you 

Replies (36)

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By johngroganjga
06th Aug 2020 12:49

Probably not without it also being a benefit in kind, but what is the area of research being undertaken, and how, if at all, is it relevant to the company’s other activity?

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Replying to johngroganjga:
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By Newacct06
06th Aug 2020 12:54

I have tried to explain this to them. They are insisting that the research 100% relates to the activity of the company.

Please do you know of any HMRC manual I can refer them to. I can only find one for self employment?

Thank you

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Replying to Newacct06:
By johngroganjga
06th Aug 2020 13:20

Newacct06 wrote:

I have tried to explain this to them. They are insisting that the research 100% relates to the activity of the company.

You will need to tell us what the activity of the company is, and what the field of research being undertaken is, before anyone can help you.

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Replying to johngroganjga:
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By Newacct06
06th Aug 2020 13:37

The research is on robotics and autonomous system. The company activity is in information systems and scientific.

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Replying to johngroganjga:
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By matchmade
10th Aug 2020 10:24

johngroganjga wrote:

Probably not without it also being a benefit in kind, but what is the area of research being undertaken, and how, if at all, is it relevant to the company’s other activity?

To me this is pretty crucial: robotics and information systems is a wide field. If the funding is coming from a research council for a project devised by an academic at a university, and the project is only loosely related to ongoing work undertaken at the limited company, then this sounds more like training/education to improve one's education. HMRC won't want it to appear that the limited company was partly set up to fund the director's aspirations for a PhD!

However if the PhD project has been co-devised by the company, the university and a funding body, and the project is considered relevant both to the PhD supervisor's work and directly to the work of the limited company, then I think a good case can be made that this is tax-deductible, especially if the limited company is investing in the project, either with equipment or with business contacts and expertise, or in the form of the director's own time. This is collaborative research for which the PhD qualification is only incidental.

This latter kind of university-private collaboration goes on all the time: I've known many science academics and business people whose PhD was just a cut and paste job: they produced a series of papers, usually funded by a research council but sometimes when they were also working for a private company and collaborating with a university, which they stitched together with a narrative, as part of a field of research, and then just carried on immediately afterwards with more papers, commercial applications, behaving partly like a university researcher, perhaps with teaching duties thrown in, and partly like a researcher working in private industry. The PhD was just a minor step along the way, not some big transition point in their life. Would it be worth ringing up a university science park of two, or a robotiocs or engineering department at a university, and asking if they have encountered this situation before and their experience of the tax situation?

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Hitch photo
By Kevin Kavanagh
06th Aug 2020 12:49

Well, the test is, is it 'wholly, exclusively and necessarily' incurred - a high bar to beat and much more onerous than if he or she were self employed.

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By Tax Dragon
06th Aug 2020 13:10

HMRC guidance starts around EIM01200.

A couple of thoughts

- directors often have a higher bar to clear than ordinary employees. I'm not aware whether that is true with s250 etc, but look out for it in case

- PhD is research, not training. Is R&D a more relevant tax relief? Who is going to own the product of this research?

Otherwise I agree with John - allowable for company, but (indeed because) taxable on director.

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Replying to Tax Dragon:
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By Newacct06
06th Aug 2020 13:38

However, I would think that this an educational cost as the director will gain a qualification from it

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Replying to Newacct06:
Psycho
By Wilson Philips
06th Aug 2020 13:44

You can think what you want. More than one contributor has advised on what they consider the correct treatment to be. I agree with them.

I have a follow-up question, but I’m not allowed to ask.

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Replying to Wilson Philips:
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By Tax Dragon
07th Aug 2020 06:57

Wilson Philips wrote:

I have a follow-up question, but I’m not allowed to ask.

That rule has now been interpreted in a purposive fashion by the Supreme Court. Seems you are allowed.

(But I think a purposive reading is s250ff would not favour the director.)

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Replying to Tax Dragon:
RLI
By lionofludesch
06th Aug 2020 14:09

Tax Dragon wrote:

- PhD is research, not training. Is R&D a more relevant tax relief?

I agree with Drags - BIK on the director.

I just get the feeling that this would have a better chance of success if there was research without a PhD at the end of it.

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By Newacct06
06th Aug 2020 16:42

I get it.

Thank you to everyone who contributed

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Red Leader
By Red Leader
06th Aug 2020 18:07

I suspect that, in any case, the plan is dead in the water if the individual rather than the company contracts.

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Replying to Red Leader:
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By Tax Dragon
06th Aug 2020 20:47

That's what I would have expected too, but, interestingly, it doesn't seem to matter. I don't have the legislation (ITEPA s250ff) in front of me right now, but it expressly refers to reimbursement.

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Replying to Tax Dragon:
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By Tax Dragon
07th Aug 2020 06:53

See mrme89 below - s250(1)(b).

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By gillybean04
06th Aug 2020 19:53

https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim31650

Therefore, to satisfy this test, the expense must be incurred in actually carrying out the duties of the job. It is not enough for the expense to be relevant to the job, or to be incurred in connection with the duties of the job. Nor is it enough if the expense only puts the employee in a position to start work or keeps the employee qualified to do the work. Expenses that are incurred in preparation to carry out the duties of the employment or as training to carry out the duties of the employment are not deductible.

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Replying to gillybean04:
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By Tax Dragon
06th Aug 2020 20:49

Yes if you're relying on s336 then there's no hope. That's why s250ff is less stringent.

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By mrme89
06th Aug 2020 20:10

https://www.legislation.gov.uk/ukpga/2003/1/section/250

‘ the cost of obtaining any qualification, registration or award to which the employee becomes or may become entitled as a result of the training or such an examination or other assessment.’

A PHD is almost certainly a qualification.

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Replying to mrme89:
Psycho
By Wilson Philips
06th Aug 2020 20:43

You need to understand what a PhD involves. Obtaining a PhD is a personal endeavour by the individual - a personal quest for knowledge, with a thesis at the end of it. I have one, and I would never have considered it to be training.

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Replying to Wilson Philips:
By mrme89
06th Aug 2020 20:49

https://www.legislation.gov.uk/ukpga/2003/1/section/251
View outstanding changesstatus warnings
251Meaning of “work-related training”

(1)In this Chapter “work-related training”, in relation to an employee, means a training course or other activity designed to impart, instil, improve or reinforce any knowledge, skills or personal qualities which— (a)are likely to prove useful to the employee when performing the duties of the employment or a related employment, or

(b)will qualify or better qualify the employee—

(i)to perform those duties, or

(ii)to participate in any charitable or voluntary activities that are available to be performed in association with the employment or a related employment.

I think a PHD reinforces the knowledge already gained. I also think they are likely to prove useful.

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Replying to mrme89:
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By Tax Dragon
07th Aug 2020 07:13

mrme89 wrote:

I think a PHD reinforces the knowledge already gained. I also think they are likely to prove useful.

When I read s251, I had a similar thought (except I went went for instil rather than reinforce). But I still concluded it's not work related training. I think you have overlooked the significance of the word "designed". A PhD may well enhance the skillset you use for work. But it's not designed for that purpose.

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Replying to Tax Dragon:
By mrme89
07th Aug 2020 07:29

Admittedly, I’m a bit of a dumb a$$ and not educated to PHD level.

However, I’ve just looked at the different types PHD.
https://www.prospects.ac.uk/postgraduate-study/phd-study/what-is-a-phd

Both a ‘New Route PHD and ‘Professional Doctorate’ include teaching elements.

Would your view change if the PHD the OP’s client is wishing to undertake was one of these?

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Replying to mrme89:
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By Tax Dragon
07th Aug 2020 07:54

Professional Doctorate - worth investigating. Others... still no, really (as Blackadder might put it).

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Replying to Wilson Philips:
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By Rgab1947
10th Aug 2020 11:48

Irrelevant. All qualifications are personal endavours by the individual. I have a few degrees all paid by me and company support was getting time off to sit the exams.

And a payrise when I passed!

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Replying to mrme89:
Red Leader
By Red Leader
07th Aug 2020 08:38

"the cost of obtaining any qualification, registration or award to which the employee becomes or may become entitled as a result of the training "

Does that have a narrow meaning perhaps? Referring to getting the piece of paper at the end rather than the cost of the training leading up to it?

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Replying to Red Leader:
By mrme89
07th Aug 2020 09:07

That’s my reading. Particularly with the word ‘or’. There’s no doubt a qualification is gained.

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By Tax Dragon
07th Aug 2020 11:17

Just to be clear, gaining a qualification is not a condition for the exemption to apply [nor, @Lion, a bar to its application]. The words quoted (part of s250(2)(c)) extend the class of costs, payment or reimbursement of which may be within the exemption. They're nothing to do with whether the exemption applies in the first place, nor with the definition of work-related training given in s251.

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By Rgab1947
10th Aug 2020 11:44

No

Plenty guidance on that on HMRC websites and manuals.

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By fawltybasil2575
10th Aug 2020 18:14

@ Newacct06 (OP).

There are two separate (albeit related) aspects, the first being your implied initial question of whether the cost will “qualify as a tax deductible cost"; and the second being whether the costs at issue represent taxable (or alternatively exempt) income in the context of the relevant legislation (ie ITEPA 2003)(I appreciate that only the former aspect was raised in your question, but I trust you would agree that the latter must also be considered).

(i) Allowable for Corporation Tax ? The key lies in your comment (your post at 13.37 on 6 August 2020):-

“They are insisting that the research 100% relates to the activity of the company.”

If this means, as I am inclined to believe it does, that the PURPOSE of the PhD studies was obtaining knowledge so as to benefit the company, then those costs are indeed allowable for Corporation Tax. Other posters have above explored this aspect in the context of technical aspects of robotics etc. If I were acting for the company, I would certainly seek to understand robotics, and related technical matters, far and away out of my comfort zone, as part of my acting. If I was then happy that the director’s reason for those costs was valid, then unhesitatingly I would allow them in the Corporation Tax Computation (the fact that an incidental personal benefit accrued to the director not being relevant).

(ii) Taxable or Exempt, for ITEPA 2003 ?

Mrme89 has very helpfully alerted us to Sections 250/251 ITEPA 2003. When that legislation was introduced, it was with the intention of encouraging, in as wide a manner as possible, learning new skills/obtaining new knowledge, and/or enhancing existing skills/knowledge, without its landing the taxpayer with any Income Tax liability; and hence that legislation is extremely widely worded, to encompass skills/knowledge not just for immediate use but for possible future use. In that context, and again assuming that the PhD costs are being incurred so as to use the knowledge obtained therefrom for employment purposes, whether for this company or elsewhere, then those costs are “exempt” from Income Tax (again notwithstanding the fact that a PhD qualification may be obtained as a consequence).

Basil.
EDIT. As per my later post below, "or elsewhere" is incorrect (my apologies); and should read "or with a person connected with the employer".

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Replying to fawltybasil2575:
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By Tax Dragon
10th Aug 2020 14:33

The difficulty I have with that, Basil, is that s251 refers to THE employment. And the above reference to "designed" is in that context.

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By fawltybasil2575
10th Aug 2020 18:31

@ TaxDragon.

(i) I apologise for the incorrect use of "or elsewhere" in my last post - see my "EDIT" now made to that post, please.

(ii) As regards your second point (ie your reference to the word "designed") and with respect of course, I believe, if I correctly understand you, that you are misinterpreting the legislation. As long as the "training" or "activity" is "designed" to provide knowledge/skills PER SE, which could be of use at any time in the employment [or "related" employment:)] then the costs are exempt.

Forgive me if I have misunderstood your point, but you appear to be stating that, for the costs to be exempt, the training/activity must be "designed" for a particular employment: such is not the case. If that is not however your point, I must confess that I am unclear as to what particular point you are seeking to make, and would welcome your kindly clarifying.

Basil.

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Replying to fawltybasil2575:
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By Tax Dragon
10th Aug 2020 19:57

Thanks Basil. You summarise my reading of the legislation correctly.

The relevant sentence (as mrme89 has already quoted), reads:

"In this Chapter 'work-related training', in relation to an employee, means a training course or other activity designed to impart, instil, improve or reinforce any knowledge, skills or personal qualities which are likely to prove useful to the employee when performing the duties of the employment or a related employment, or will qualify or better qualify the employee to perform those duties, or to participate in any charitable or voluntary activities that are available to be performed in association with the employment or a related employment."

Wilson has rightly picked me up on my habit of crossing out too many words, but for our discussion, I think the sentence simplifies (using the cross-out method) fairly accurately to:

"'Work-related training' means a training course designed to [enhance] any knowledge likely to prove useful to the employee when performing the duties of the employment."

If we agree so far, then the next step is to decide whether that means the course is designed to improve knowledge, and (it so happens that) that knowledge will be useful in performing one's duties [your reading], or whether the course is designed to enable one better to perform one's duties [my reading].

We may have to agree to disagree. But what really intrigues me is that you appear to suggest in your previous comment that your interpretation is consistent with the purpose of the section. I'd say the opposite. HMRC (EIM01220) simply says that the training must relate to the employment. That could indeed be read either way.

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Replying to Tax Dragon:
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By fawltybasil2575
11th Aug 2020 00:40

Forgive me, but assuming your reference to Wilson is correct, then I must join him in that opinion, ie your abbreviating legislation in a manner which thereby misrepresents it.

By concentrating on the word “designed” you misinterpret the legislation by not noticing the two “or” words (and the words which follow them, of course).

The HMRC guidance to which you refer in your closing paragraph appears as a separate paragraph, in that guidance, its purpose being to explain that if the costs refer to a related business, the treatment of those costs applies identically to the employer at issue.

Re the remainder of your closing paragraph, I regret that I am unable to determine which “previous comment” and the (related) “interpretation” you are referring to.

That point is however academic. The legislation IMHO is, as legislation nearly always is, entirely clear: as I stated in my last post, it is intentionally very widely expressed so as to encourage the incurring of costs which could benefit the employee, in any one of a variety of ways, in relation to the employment at issue (or a related employment) either immediately or at a future date. In short, the legislation does not impose the condition that the costs themselves be “designed” for the employment (as I sought to explain in my second paragraph above).

Forgive me again, but if I were to add to this thread, such addition would only paraphrase what I have previously said.

Basil.

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Replying to fawltybasil2575:
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By Tax Dragon
11th Aug 2020 10:45

I simplified in order to explore the context of the word "designed" as per my comment timed at 14:33 on 10th Aug. 2020.

If a PhD would not be exempted by my simplified sentence (as a training course designed to [enhance] any knowledge likely to prove useful to the employee when performing the duties of the employment), then I would venture it would not be exempted by the full sentence. Put another way, which of the deleted "or" clauses do you need (me) to reinstate in order to include a PhD within the scope of the exemption?

Forgive my persistence, but I would invite you to answer that question, as I believe this could be done without risk of merely paraphrasing yourself.

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Replying to fawltybasil2575:
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By Newacct06
11th Aug 2020 12:39

Thank you very much for your concise explanation.

This does certainly answer my question.

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Replying to Newacct06:
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By Tax Dragon
11th Aug 2020 13:48

Your question concerned where guidance was to be found. Basil has, without knowledge of the facts, sought to answer a different question, specific to your client. You should (given that lack of knowledge of the facts) treat that answer with due caution.

As he's not responded to my question, I too am 'out' of the discussion. You might though want to [enhance] your own knowledge of relevant considerations with some more reading, starting at BIM47080. I said in my very first post that there may be considerations specific to directors. It seems HMRC and the courts agree.

One final specific point: there may be a correlation between taxability on the director and deductibility for the company. John drew your attention to that correlation in the first reply. Reading BIM will give you more background about that.

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