VAT on invoice to employees

Employee leaving company has asked to be invoiced, should the invoice include VAT?

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The employee is leaving and needs to pay back their professional course fees, they've asked for an invoice - should the invoice include VAT?

The course invoice included VAT.

Replies (91)

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Replying to Justin Bryant:
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By kim.shaw-and-co.com
31st May 2024 16:26

Justin Bryant wrote:

Absent supporting legislation/case law, I do not agree that a gift of an oven to a customer/client as a thank you or whatever is analogous to the transfer of an oven by an employer to their employees to incentivize/reward them. Google s87 CGT and EBTs and you'll see HMRC agree and it should make no difference if the oven is transferred first to an EBT.

https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg38580

I think I now understand (finally) the issue that you are grappling with in terms of HMRC's interpretation.

However, terms may be used in certain contexts in legislation which do not have the same meaning or interpretation in other contexts.

The full value of input tax can be retained by an employer on the cost of provision of entertainment to non-employees at a staff party by levying a nominal charge to them for their attendance (in respect of which at least some output tax is accounted for). You are no doubt well aware of the case law supporting that. The issue for the employer (to the extent there meaningfully is one that which cannot readily be taken out of point following a similar approach) is what happens when nothing is 'made good'.

That the employer makes a supply when the asset is provided is not (at least I assume) in question here. It is what the employer receives for that supply, and what happens in consequence, which is then relevant. Where (any amount of) monetary consideration is received then that is the value of the taxable supply. Where nothing is received your contention appears to be that 'nil' consideration is to be assumed.

The legislation carves out particular circumstances when this is to be assumed in connection with supplies made by employers to their employee(s), and they are constrained to circumstances where the employee's receipt of those supplies is (objectively) necessary for the proper performance of their duties. Those circumstances are found in VAT Act 1994 Sch. 6, Paragraph 10.

It would not be necessary for the legislation to specify circumstances where the provision of supplies by an employer to an employee for no consideration gives rise to a taxable value of 'nil' in relation to the relevant supply unless the default assumption in the alternative were that a supply for deemed consideration had been made to the recipient instead.

Let us say that the employee's services were instead treated as consideration for supply of an asset (and that HMRC are wrong to apply an analysis consistent with the asset being treated in the same way as a business gift instead, i.e. subject to an output tax charge if input tax is claimed).

The value of the employee's services received in return for the reward would become the value of deemed consideration received (see barter transaction principles referenced above).

Putting some numbers on it, say the asset cost £10 ex-VAT. Services of £10 are received and treated as consideration. If they aren't then we're back to questioning the purpose of the disposition made to the employee.

Employer is then liable to account for VAT out of the £10 - an output tax charge of £1.66 to offset the input tax of £2 claimed. The employer has 'banked' a cash saving of the princely sum of £0.34. A saving of £34 on every £1,000 - about an hour of their tax advisor's chargeable time per £13,000 or so of assets provided to employees (depending on charge out rate).

If that alternative approach is correct (and I do not think it is), the difference versus the outcome of HMRC's approach in terms of the VAT consequences where nothing is 'made good' appears to be substantially immaterial. So I am not sure what practical material advantage challenging their viewpoint on that basis would hope to achieve unless assets of vast value are in point ?

The well-advised employer might surely be better guided to making some charge for provision of the assets given HMRC concede output tax is limited to monetary consideration received for those assets, in circumstances where such monetary consideration passes from employee to employer for the supply of taxable goods. ?

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Replying to kim.shaw-and-co.com:
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By Justin Bryant
04th Jun 2024 11:23

Again, that's too verbose, but I see some people here seem to agree re VAT (in the example of trivial benefits at least and that's analogous).
https://www.accountingweb.co.uk/any-answers/reclaiming-vat-on-trivial-be...

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Replying to Justin Bryant:
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By kim.shaw-and-co.com
04th Jun 2024 16:07

Justin Bryant wrote:

Again, that's too verbose, but I see some people here seem to agree re VAT (in the example of trivial benefits at least and that's analogous).
https://www.accountingweb.co.uk/any-answers/reclaiming-vat-on-trivial-be...

It's comprehensive rather than verbose. Aimed at considering the bigger picture and context rather than simply a narrow analysis. So let's agree to differ on that.

Input tax can only be claimed if it is incurred for a business purpose, not just because there is a benefit to the business from the expenditure.

The point re: trivial BIKs is that HMRC may not typically pursue an output tax charge in practice for instances where the BIK value is capped and doesn't form part of the employee's contractual entitlement to remuneration from their employment.

However, strictly this is not within their 'policy' of not pursuing an output tax charge on the benefit - which applies only in circumstances where benefits of a particular type are provided to all employees of the employer.

What it doesn't mean is that no output tax charge is technically due (if input tax has been claimed). If there is a “private benefit” to the individual enjoying the benefit (whether or not a taxable benefit), this will cancel out any recoverable input tax. The 'short-cut' many use to deal with this efficiently is simply not to claim input tax in the first place.

So, you couldn't categorically point to HMRC stated policy and say there is legitimate expectation no output tax charge would arise on a trivial BIK. You'd be running the risk that they would assess it, but since amounts are small so is the likely risk they would bother.

It would be helpful if HMRC came out and stated their policy on this. They likely don't want to commit themselves because some smart-alec would try to abuse the situation with volume - and if they did they would reserve the right to assess them for their cheek, consistent with their stated view of the legislation.

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Replying to kim.shaw-and-co.com:
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By Justin Bryant
04th Jun 2024 16:11

You put Basil to shame with your lengthy comments.

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Replying to Justin Bryant:
By Ruddles
04th Jun 2024 16:15

It's not analogous, because we were not discussing trivial benefits - unless you were talking about ovens for doll's houses.

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Replying to Justin Bryant:
Stepurhan
By stepurhan
30th May 2024 10:33

Justin Bryant wrote:

Leaving aside whether you can or cannot make good certain BIKs (I believe you can for most BIKs), your above answer is not convincing and employees can make good as they wish subsequently. Even if they don't make good there seems to be an overall tax saving re the input VAT recovered by the company compared to the employee buying the oven with after tax earnings with irrecoverable input VAT.

They have given a detailed explanation of their position, with links to external sources. You are not offering anything substantial in the way of a rebuttal, simply stating your alternative view as fact without addressing any of the points made.

If you want people to take your views seriously on this subject, you really need to put in a bit more effort.

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By taxdigital
25th May 2024 09:03

A similar question appeared on here a few months ago. There is a breach of the employment terms which created a debt owed to the employer. Asking for the debt to be paid back isn’t a supply (s.5 VATA or Sch 4 VATA) of goods or services for VAT to apply. I think the whole confusion arises because of the invoice being raised which I believe the employer shouldn’t. If the employee has acknowledged the debt that is enough for an entry to be made in the books.

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Replying to taxdigital:
RLI
By lionofludesch
25th May 2024 09:30

taxdigital wrote:

A similar question appeared on here a few months ago. There is a breach of the employment terms which created a debt owed to the employer. Asking for the debt to be paid back isn’t a supply (s.5 VATA or Sch 4 VATA) of goods or services for VAT to apply. I think the whole confusion arises because of the invoice being raised which I believe the employer shouldn’t. If the employee has acknowledged the debt that is enough for an entry to be made in the books.

Best answer so far.

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Replying to taxdigital:
By Ruddles
25th May 2024 09:38

But, what if - as is usual - the employment contracr provides that the training fees are to be repaid if the employee leaves at a certain time? Leaving would not then be a breach of contract?

We need Jason.

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Replying to Ruddles:
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By taxdigital
25th May 2024 10:30

Ruddles wrote:

But, what if - as is usual - the employment contracr provides that the training fees are to be repaid if the employee leaves at a certain time? Leaving would not then be a breach of contract?

In what way that alters the answer?

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Replying to taxdigital:
By Ruddles
25th May 2024 10:45

I would say that there is a difference between a liability arising from breach of contract and a payment due in accordance with the terms of that contract.

Whether it changes the VAT analysis I don’t know - which is why I suggest we wait for the views of a VAT specialist. At the back of my mind I seem to recall that a payment made under contract is deemed to be consderation for supply. Whether that supply is taxable or not …

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Replying to Ruddles:
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By taxdigital
25th May 2024 10:58

Ruddles wrote:

I would say that there is a difference between a liability arising from breach of contract and a payment due in accordance with the terms of that contract.

And the contact in question here is the employment contract, not a contract for providing any services. The 'supply' here is the 'training' which the employer never provided. There is no 'supply' arising for VAT purposes simply because there is a breach of the employment terms.

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Replying to taxdigital:
By Ruddles
25th May 2024 11:21

Why do you keep talking about a breach of terms? If the employment contract provides- as many do - that the employee will reimburse the employer for training fees in specific circumstances that is not a breach of terms.

The (potential) supply is not the training- which was a separate supply between provider and employer. The question is whether the payment by the employee is for a separate supply. The same question that I asked several posts ago.

For avoidance of doubt, I am still leaning toward there being no VAT liability. But I’m not off the fence yet and would prefer to listen to what a VAT expert has to say on the matter.

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Replying to Ruddles:
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By taxdigital
25th May 2024 11:42

Ruddles wrote:

Why do you keep talking about a breach of terms?

Well, that's because:

a) that's what I make of what OP when they say:

Carlyannec wrote:

The employee is leaving and NEEDS to pay back their professional course fees

(my emphasis).

and

b) from what I've seen, an employee leaving the company generally pays it back when there is a breach.

I think it's time for enjoying all the sunshine while it lasts, so I'd leave it there.

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Replying to taxdigital:
By Ruddles
25th May 2024 12:01

Perhaps they NEED to pay back the fees because that is what their employment (and/or separate training) contract says. Just a thought.

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Replying to taxdigital:
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By C Graham
31st May 2024 14:45

there's no breach - it is agreed. Simply an agreement between employee and employer. Employees CAN resign. it is not a breach of their employment contract to give notice. So employer has simply covered that possibility with regards the payment of the course fees on behalf of the employee. And the only question here is whether that is now recharged back to the employee (with vat) or was a disbursement paid on behalf of the employee who has been the 'end user' of the course and must reimburse the employer. No vat. But employer could of course have agreed the employee repays the gross cost to the employer.

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Replying to C Graham:
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By More unearned luck
31st May 2024 15:55

"So employer has simply covered that possibility with regards the payment of the course fees on behalf of the employee."

You have made a fundamental change in the facts given (or assumed by most of the other respondents) with this statement. I think that it is generally accepted that the facts are that:
a) the employer engaged the trainer to train the employee
b) the trainer invoiced the employer
c) the employer paid the invoice.

That is to say that the employer didn't make the payment on behalf of the employee. If the employer was making the payment in that capacity:
1) It must mean that the training contract was made between employee and trainer
2) the payment has tax and NIC consequences that arose at that time
3) the employee wouldn't get tax relief on the training cost, and
4) no one would be able to reclaim input tax on the trainer's invoice.

All of which suggest your revised facts are unlikely to be correct.

As to the OP's question. VAT is a tax on the supply of goods and services. It is not a tax on the receipt of money*. This is reflected in terminology: VAT has outputs and inputs (the direction of flow is that of the G&S) and direct tax has income and outgoings (the direction of the flow of the cash).

*Even for traders on the cash basis; that merely alters the timing.

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Replying to More unearned luck:
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By C Graham
31st May 2024 16:16

The end user IS solely the employee which is why the employee has agreed the burden of liability to reimburse. There's no 'contract' beyond the employment contract. The fees have been paid.

'That is to say that the employer didn't make the payment on behalf of the employee.'

Yes they did. No one else did the training. The company paid it on his behalf.

'1) It must mean that the training contract was made between employee and trainer
2) the payment has tax and NIC consequences that arose at that time
3) the employee wouldn't get tax relief on the training cost, and
4) no one would be able to reclaim input tax on the trainer's invoice.'

Wrong

EIM01210 - Employment income: work-related training: general
Section 250 ITEPA 2003
The exemption in section 250 ITEPA 2003 removes any possible tax charge where an employer, or a third party, incurs expenditure on work-related training for employees. It does not matter whether the employer directly incurs the expenditure or reimburses the employee’s expenditure. The exemption covers sums that would otherwise be taxable as earnings, as benefits, or under the vouchers rules.

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Replying to taxdigital:
RLI
By lionofludesch
25th May 2024 11:36

taxdigital wrote:

The 'supply' here is the 'training' which the employer never provided.

The employer did provide it.

And now he wants the money back. Or at least, part of it.

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Replying to lionofludesch:
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By FactChecker
25th May 2024 12:07

"The employer did provide it" ... as in paid for it (not delivered it), as I also see it.

So let's look at other scenarios:
* EE asks ER to pay for training in XYZ (nothing to do with job) and ER agrees - that is presumably a BiK (value of which includes the VAT)?
* EE asks ER to pay for training in ABC (wholly relevant to job) and ER agrees - that is just an ER expense (on which input VAT will be claimed)?
* ER orders EE to attend training in ABC (as above) and EE attends but hands in notice part way through course - ER still liable to pay training supplier (on which input VAT will be claimed)?
* ER orders EE to attend training in ABC (as above) and EE attends but this time hands in notice some time *after* completing course - ER has already paid the training supplier (on which input VAT will be claimed), but wants to reclaim part of those costs from departing EE?

Like everyone else I await the exposition from Jason, but surely (that dreaded word) one issue is whether ER can claim the input VAT *and* charge VAT if the 2nd amount isn't from an onward supply of the item on which the 1st amount was levied?
And then there's the quite separate question of whether the refund (or whatever the employment contract terms it to be) is payment for a supply - and if so of what?

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Replying to Ruddles:
RLI
By lionofludesch
25th May 2024 11:34

Ruddles wrote:

But, what if - as is usual - the employment contracr provides that the training fees are to be repaid if the employee leaves at a certain time? Leaving would not then be a breach of contract?

We need Jason.

Certain time.? Like ten past three on a Tuesday in October?

What do you mean?

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Replying to lionofludesch:
By Ruddles
25th May 2024 12:00

Before training completed. Within 12 months of completion. But two examples.

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By kim.shaw-and-co.com
26th May 2024 03:13

In the end it likely depends whether the amount recouped from the employee is treated as received under indemnity.

Any input tax will have been claimed originally on the basis that the relevant training is "job-related" and therefore has a business purpose. The employer is treated as the recipient of the supply because it directly benefits from the enhancement of its human capital asset - and there is sufficient 'nexus' with the business.

Let's now use an analogy a lot of us will recognize - the invoices made out to our VAT-registered clients who are not partially-exempt, which are sent for settlement to a fee protection insurance provider.

The client (hopefully correctly) claims input tax on the relevant fees because of course there will be no adverse adjustments arising from the compliance check given the client has been well-advised and has taken notice of the advice they have received.

The fee protection insurer then settles the net value of the invoice leaving the client with no net cost borne by way of disallowed input tax or net P&L cost of services received.

A repayment by the employee under indemnity of a cost which was properly a business expense of the employer at the time of receipt appears unlikely to disturb the original VAT treatment applied by the employer.

Being pedantic, if the employer had not received any value from the training received by the employee (for example if they had received it, immediately gone on holiday and then left before the employer got any benefit at all) then it might be argued that the circumstances call into question the original deductibility of the relevant input tax paid on the training.

However, provided they got at least some benefit from the training it may be unlikely that HMRC take the point that there may fairly be some non-business element of the costs in respect of which an input tax claim (with perfect foresight) may have been restricted.

A request for payment not amounting to a VAT invoice is likely the appropriate way of requesting repayment of relevant costs from the employee. To the extent the business decides that no supply is being made and an indemnity receipt is in point, then VAT would not form part of this and the amount recovered would as a maximum be limited to the net cost to the employer.

If the employer considers that their loss extends to include input tax originally suffered, that input tax would have to be disclaimed if the employee is being expected to cover it.

It all depends on the original purpose of the expenditure and whether it can reasonably be shown that it was appropriate for the business to recover that VAT as input tax at the relevant time it was incurred.

I cannot, however, see it being appropriate for a VAT invoice to be raised to the employee. The employer is not making a supply to the employee (and, incidentally, the employee is not VAT registered or if they are no supply is being made to them by the employer for the purposes of an employee's business, the payment is being requested in connection with the employment of an employee).

What would be preferable would be for the employer to present the relevant employment contract and any side letters and correspondence relevant to the issue to a VAT specialist to fully review, along with copies of the original training invoice(s) and a note of how these were treated in the company's returns.

A consideration of all relevant factors in the round could then be performed and appropriate advice provided following completion of that exercise.

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Replying to kim.shaw-and-co.com:
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By FactChecker
26th May 2024 13:17

Brilliant, that (with your slightly earlier response further up) covers every single little niggle that I've been raising somewhat ham-fistedly ... and puts them all into a cohesive, logical structure.
[And I like the pedantic point about the possibility of ER gaining zero benefit - even if rare. As my old teacher used to say 'that's not pedantic, just ensuring every i is dotted and every t is crossed'!]

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Replying to FactChecker:
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By kim.shaw-and-co.com
27th May 2024 15:33

FactChecker wrote:

Brilliant, that (with your slightly earlier response further up) covers every single little niggle that I've been raising somewhat ham-fistedly ... and puts them all into a cohesive, logical structure.
[And I like the pedantic point about the possibility of ER gaining zero benefit - even if rare. As my old teacher used to say 'that's not pedantic, just ensuring every i is dotted and every t is crossed'!]

Gosh, @FactChecker ... not used to having my tummy tickled !

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Pile of Stones
By Beach Accountancy
30th May 2024 14:27

Don't you just love VAT. 56 replies on a straight-forward question.

Can we send this to ICAEW and claim the £5,000?

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Replying to Beach Accountancy:
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By C Graham
31st May 2024 12:42

It's pretty ridiculous isn't it. Training to improve work skills that benefit an employer is not a BiK. It may enhance the employee's skills on their cv but it is ultimately the employer who benefits by gap filling skills that are required. The employee presumably has had to undertake study time or courses under their contractual agreement.

How anyone manages to get 'buying an oven' into a relatively simple question about a reimbursement to their employer of expenses for a training course is ridiculous. The answer is - it depends. Recharge or disbursement?

If the agreement says the employee will be liable for the full costs of training if leaving within a said period, they are simply recharging the course value. Vat included it is therefore a recharge and gross value to be repaid.

However if the agreement was that if employee resigned and that any costs of his/her employment of training during employment would be deducted from final net salary, then no vat. Simply deduct the net cost as the company will have recovered the vat. If it forms part of an employment contract then it sounds like the training is simply a disbursement paid by the company on behalf of the employee. No vat.

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Replying to C Graham:
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By kim.shaw-and-co.com
31st May 2024 13:48

C Graham wrote:

If it forms part of an employment contract then it sounds like the training is simply a disbursement paid by the company on behalf of the employee.

... implying, surely, that no input tax could be recovered in the first place because for it to be a disbursement the supply is treated as made to the employee and not the employer, and the employer cannot recover VAT on a supply made to a different person ...

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Replying to kim.shaw-and-co.com:
RLI
By lionofludesch
31st May 2024 13:54

This is all getting very murky .....

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Replying to kim.shaw-and-co.com:
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By C Graham
31st May 2024 14:11

yep

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Replying to C Graham:
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By kim.shaw-and-co.com
31st May 2024 14:36

C Graham wrote:

yep

I doubt that simply deducting from net wages is sufficient of itself to influence the VAT position, that is merely the mechanism through which a payment is collected from the employee.

Completely agree with you that "it depends" on the arrangements, hence in the absence of relevant facts no conclusions can be drawn. Optimally, the employee would likely indemnify the employer against their losses in the event they were to leave.... and that's the point at which legal advice would be required in relation to the documentation and particular fact pattern in point.

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By C Graham
30th May 2024 19:45

What was the agreement? Decide if it was a disbursement or a recharge. If it was treated as essential to the employee doing his/her job then surely part of the course fee has been utilised pro rata to the total cost. It depends entirely on the agreement. It will be outside the employment contract but may have been subject to repayment if the employee left before an agreed term. I don't think there is any definite answer.

If it was for example a season ticket loan (vat exempt) then those would simply be deducted from net salary. But for vat rated courses then it entirely depends on conditions imposed outside the employment contract.

Answer is ... depends.

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RLI
By lionofludesch
31st May 2024 15:33

So, anyway, are we any nearer to deciding whether the fella should charge VAT?

Maybe we should just vote, yes or no.

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Replying to lionofludesch:
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By C Graham
31st May 2024 15:57

It's a No from me.

it is (appears) to be a condition of his employment contract. Not a company loan but designed with the sole purpose to increase his skills to the benefit of the employer.

And my guess is that for his 'toil' his enhanced skills have had some positive impact on the job he was doing for the employer.

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Replying to C Graham:
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By FactChecker
31st May 2024 16:05

I don't know why sometimes I just can't leave well alone, but ...
... "designed with the sole purpose to increase his skills to the benefit of the employer" is a massive assumption.

In many organisations, particularly those in professional services, training is mainly targeted NOT on what the employee needs to do current job - but on what will help employee to progress to next level (or even new specialism).
Of course the employer's hope is that this is an investment that, in the future, will benefit both parties ... but the point of the clawback clause is precisely because the employer doesn't expect to see any benefit for say 2+ years (and so wants the cost reimbursed if no benefit will arrive because employee leaves with new skill).

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Replying to FactChecker:
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By C Graham
31st May 2024 16:29

pedantic but ok - I will remove the word 'sole' but otherwise it must be beneficial - and mutual by default. Normally agreed with the intention to benefit the employer and increase the skills/ability the employee provides.

Projection is futile in this case as the guy resigned. Hence the penalty for terminating prematurely and a no-risk investment therefore.

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Replying to lionofludesch:
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By C Graham
31st May 2024 15:59

...fella should 'be recharged' not 'charge - he's paying not billing.

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Replying to lionofludesch:
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By bettybobbymeggie
31st May 2024 16:05

A vote!

It's 'no' from me.

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By prseymour
04th Jun 2024 10:40

Apply common sense - the company should make no loss/no gain.
Treat as if the employee had paid it themself, ie their cost would include VAT.
"Apply Common Sense" is my ICAEW £5,000 suggestion - 'What would the person on the Clapham omnibus say/do'

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By prseymour
04th Jun 2024 10:40

Apply common sense - the company should make no loss/no gain.
Treat as if the employee had paid it themself, ie their cost would include VAT.
"Apply Common Sense" is my ICAEW £5,000 suggestion - 'What would the person on the Clapham omnibus say/do'

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Replying to prseymour:
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By More unearned luck
05th Jun 2024 11:25

Since when have tax and common sense been bedfellows?

In the period between between the training and the date the employee left presumably the employer gained by having a more highly trained employee. Whether that gain was greater than the cost of the training is unknown (and probably unknowable), so the arbitrary formula in the employment contract is bound to give a gain or a loss.

Why, in the absence of a tax rule that says you must, would you base tax on a fictitious state of affairs?

I think that the man on the Clapham omnibus would have the common sense to take professional advice.

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