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University Fees. An allowable expense?

University Fees. An allowable expense?

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During a rare trip to the pub the other night the conversation got round to the cost of university fees, as it frequently does for parents with children of a certain age.

One of our group, a self employed building surveyor, proudly declared that his only son was going to follow in his old dads footsteps and become a surveyor. He then went on to say that he would employ his son and his firm would then pay his university tuition fees which would be tax deductible. This announcement was met with a stunned silence from the rest of the group. Looking round I could see that all the dads were mulling the implications of this over in their minds. Eventually the more observant in the group realised that there was an “expert” in their midst and slowly all the eyes and faces turned to me in anticipation of my informed words of wisdom on this matter.

As an accountant this is the moment I dread, almost as much as when a new acquaintance asks what I do for a living. So I gave my usual non-committal answer about every situation is different and you would need to sit down with your accountant to go through all the details blaah, balaah blah. Luckily I spotted that the pub were now stocking a new variety of pork scratchings and managed to divert everyone’s attention.

Anyway; the above mentioned surveyor phoned me this morning to express an interest in transferring his business to me (I have recently set up my own practice). Obviously this is good news but I know the issue about his son's university fees will come up.

I would be grateful for comments from others please on the viability and possible implications of his proposal. I know him very well. He is trustworthy and I have no doubt that his son will genuinely be employed by him i.e. have to work for a living. He is a Ltd company with just himself and 1 employee. 

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By James Hellyer
29th Sep 2011 11:52

Supporting student children

While employers are able to pay a tax-free scholarship to an employee who attends full time university or technical college, family companies are unable to take advantage of these arrangements in respect of the children of directors. An employee parent would be deemed to receive a BIK equivalent to the scholarship.

 

 

 

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Replying to KPS:
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By occca
29th Sep 2011 13:05

Link please

James Hellyer wrote:

While employers are able to pay a tax-free scholarship to an employee who attends full time university or technical college, family companies are unable to take advantage of these arrangements in respect of the children of directors. An employee parent would be deemed to receive a BIK equivalent to the scholarship.

 

 

 

 

I was wondering this too - could you please point us in the direction of guidelines on this

 

Thanks

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Replying to Shirley Martin:
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By ACDWebb
29th Sep 2011 13:15

Hit 1 when Scolaship entered as a search on HMRC site

Scholarship for employee's family member

Guidance for employers on the tax and NICs rules if you provide a scholarship to a member of an employee's family

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By George Attazder
08th Oct 2011 11:43

I'll offer you two letters...

W and E.

ie it's not an expense incurred wholly and exclusively for business purposes.

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By listerramjet
29th Sep 2011 12:49

presumably depends on the circumstances

and you would expect that it would be caught out somewhere along the way, but actually it sounds like an excellent idea.  After all KPMG offer something similar.

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By James Hellyer
29th Sep 2011 13:16

No link, but

... from memory it's the provisions of s22 ITEPA 2003 that catch directors of family companies.

However, I don't think the legislation prevents other relatives from benefitting, providing they don't live with the employer and aren't dependents. Obviously neither parent should be involved in the company. There would also have to be a valid employment contract.

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By petersaxton
29th Sep 2011 16:46

I don't understand the problem

Isn't it simply a benefit in kind?

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By James Hellyer
29th Sep 2011 16:54

Not always a BIK

Under s776 ITTOIA 2005 employers can pay tax-free scholarship or expenses of up to £15,000 pa (I think) to an employee in full time higher eduation. No tax or National Insurance charge applies. If the employee is the director's child, it is a BIK on the director.

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By petersaxton
29th Sep 2011 17:08

Self employed employer

What about if the employer is self employed and the employee is the son of the employer?

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By taxhound
29th Sep 2011 18:28

self employed

If it is an employee's child and there is no family connection with the owner, the rules would be the same.  If there were a family connection with the owner, then wholly and exclusively spring to mind, making it disallowable. 

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By dje198
05th Oct 2011 12:36

Cross-scholarships

On a tax course I attended a few years ago, they suggested that if you had a friend with their own business and a university aged child you could cross-support, and so your business gives a scholarship/employ's their child and their business supports yours.  Would that work?

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By ianthetaxman
05th Oct 2011 15:31

fees

Not sure if this adds anything to the discussion, but the following is in the current BIM:

"Where on the other hand an employee or director of a company, on whom the expenditure is incurred, has a significant proprietary stake in the business or is a relative of those who do, 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. If that is the case then the expenditure is not deductible - the business purpose has to be the exclusive purpose. To take an extreme example, there could be no allowance 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.

Finally a caveat on the purpose of expenditure: where an employer carries on more than one trade or profession, either at the same time or consecutively, expenditure on training, like other expenditure, for the purpose of one such business (or partly for its purpose) cannot be deducted in computing the profits of the other. """ "

So the chance of the tuition fees being allowable by the father in his business seem to be pretty slim.  I think the last paragraph might cause some difficult with the cross-scholarship idea, unless you were able to justify the reasoning behind the costs.

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By Vince54
05th Oct 2011 16:54

See if this link sheds further light on this discussion.  It confirms the £15,000 limit James Hellyer mentioned and details the necessary conditions that apply.  Note that this refers to income being paid tax and NICs free rather than claiming tuition fees as a deduction.

http://www.hmrc.gov.uk/manuals/eimanual/EIM06236.htm

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By Briar
06th Oct 2011 12:05

Why not make the son a non-executive director

If the son were to attend Board Meetings and take part in the Board's discussions and decision making, then couldn't a director's fee be paid to him for attending such meetings as a non-exec director?

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By frauke
10th Oct 2011 10:33

"hearing" what one wants to hear.

I have had this discussion before with clients, and the biggest problem is they don't understand the conditions.

I explain the money can be towards living expenses, books etc and paid out on that basis, of course subject to the limits - IT MUST NOT TO AWARDED TO PAY FEES.  My understanding has always been to help support an employee that is on a long term - i.e. at least 12 months "sandwich type" course as normally their income drops due to not working during term time.

It should be awarded and paid directly to the employee.

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By mikewhit
11th Oct 2011 12:31

General taxation

Since the tuition fees (loan) would be repayable by the student and not the parent, how is it a BIK for the parent ? And what about "independent" students (ie. those no longer deemed dependents on their parents).

Of course these shenanigans would be less relevant if the student loan repayment was taken from pre-tax income rather than already-taxed income. Cannot see that the current mechanism is fair given that it used to be paid from general taxation; they are having their cake and eating it.

It should be analogous to pension tax credits.

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By Cant Add Up
11th Oct 2011 13:27

What about a sole trader's child???

Can they get the scholarship tax-free etc????

 

 

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By George Attazder
11th Oct 2011 13:41

@ Can't Add Up

Yes... Any parent can pay for their child to go to university without the child getting taxed on it as income.  The parent will have difficulty getting a tax deduction for it as a scholarship, because, prima facie, it isn't expenditure incurred wholly and exclusively for the purposes of the trade.

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By mikewhit
11th Oct 2011 14:42

The covenant-snatcher

The previous tax avoidance measure for parental contributions to students was (I am informed by AW members) withdrawn under Mrs. Thatcher's regime. But in those days the tuition and maintenance fees were paid by the local authorities (LEA ?) IIRC.

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Replying to Glennzy:
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By ACDWebb
13th Oct 2011 14:10

It went

mikewhit wrote:

The previous tax avoidance measure for parental contributions to students was (I am informed by AW members) withdrawn under Mrs. Thatcher's regime. But in those days the tuition and maintenance fees were paid by the local authorities (LEA ?) IIRC.

about 22 years ago, just as my youngest was born IIRC
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