One of the most exciting (relatively speaking) tax-related announcements to emerge from Philip Hammond’s inaugural Spring Statement relates to tax relief on work-related training.
You might be surprised that this is an issue at all, let alone one worthy of a 34-page Treasury document: Taxation of self-funded work-related training.
After all, if an employer pays for or reimburses the cost of work-related training for one of their employees, tax relief is already available. Similarly, if a self-employed individual invests in training to improve their ability to carry out their duties to the best of their abilities, this will qualify for tax relief, if and only if the expenditure is wholly and exclusively incurred to enable them to do their job properly.
What’s the point?
Some people may suggest that this new consultation might be of more political value to the Chancellor, rather than offer the prospect of major benefits for very many taxpayers. However, according to HMRC statistics, around 860,000 employees and 500,000 self-employed individuals self-funded work-related training in 2016. It is admitted that some of this training might have had a “recreational element”, perhaps relating to languages or sports? In such cases, the government has made it clear that it would not expect to offer any kind of tax relief.
Tax relief is currently available in the vast majority of cases for both employed and self-employed people who enter into courses that are directly related to their jobs. Further, specific legislation applies to work-related training funded (or reimbursed) by employers as part of a termination exercise, where employees are to be released and may need to learn new skills in order to find work after they leave their current roles.
The relatively limited gap that has been identified relates to situations where individuals pay personally for work-related training, particularly if this does not relate to their existing employment.
In this consultation, the government wants to gain an understanding of:
- how it can best learn the lessons from those previous initiatives, such as vocational training tax relief in the 1990s, and tax deductions for training in other countries.
- how it could 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.
- how it could design an extension that prevents misuse on recreational activities, is sustainable for the public finances, and is simple to understand and administer.
In this context, work-related training for which tax relief would be available is training for an employee’s current employment or a “related employment”. It is defined as any training course or other activity which is designed to impart, instil, improve or reinforce any knowledge, skills, or personal qualities which:
- are, or are likely to prove, useful to the employee when performing the duties of the employment or related employment;
- will qualify or better qualify the employee to perform the duties of the employment; or
- will qualify or better qualify the employee to participate in charitable or voluntary activities performed in association with the employment or related employment
A “related employment” is:
- any office or employment held with the employer or which is to be held with the employer or a connected person
- any such office or employment to which the employee has or can realistically expect to have a serious opportunity of being appointed.
There is an exclusion if the intention of the training is to reward an employee, is an inducement, for example, to take up a new job, or enables the employee to enjoy “facilities or benefits provided for entertainment or recreational purposes unconnected with work-related training”.
In connection with retraining for new employment, similar rules apply but there are some limitations, for example, the course cannot exceed two years, and the exemption will only be available where the employee has worked for the employer for at least two years by the time that the course starts or when the employment ceased. Additionally, he or she must leave the employment within two years of finishing the course. Finally, all employees in a similar position must be offered opportunities to attend such courses.
Self-funded training by employees
Where employers refuse to fund or reimburse training costs, possibly because they do not relate to the existing job or budgets are tight, an individual can claim tax relief personally but only if:
- the employee is obliged to incur and pay it as a holder of the employment
- the amount is incurred wholly, exclusively and necessarily in the performance of the duties of the employment; it is not sufficient that the expenses incurred to enable the employee to either prepare for his duties or to improve his ability to perform those duties.
There have been a number of tax cases over the years in which employees have unsuccessfully claimed tax relief, particularly in situations where they failed to jump the second hurdle.
Self-funded training by the self-employed
Similar rules apply for the self-employed but they have a lesser requirement in that the expenditure must be wholly and exclusively (but not necessarily) incurred for the purpose of the business.
The Chancellor wishes to learn from overseas examples. He is also acutely aware of relatively high profile failures including Vocational Training Tax Relief in the early 1990s, and Individual Learning Accounts a decade later, which carried suggestions of potential fraud.
He has additionally explicitly stated that protections must be put in place to avoid allowing tax relief for what is effectively the cost of recreational activities or other personal benefits.
In this light, the public is being asked to consider tax relief in situations where individuals undertake and personally fund training to maintain or update existing skills or qualifications or learn/acquire new ones. This will also include retraining to enable both employed and self-employed to move into a new job.
Broadly, the idea seems to be to consider allowing tax relief where individuals incur expenses on their own account that would have been relieved had employers paid the costs.
Inevitably, cost is an issue and one suggestion is that there might be a cap on relief such that no expenditure above (say) £500 would qualify. The document does not state whether the £500 would relate to an individual for life, an individual per tax year or each training course.
This consultation has a deadline for views of 8 June 2018. You can reply directly to [email protected] or post your comments below and we will provide a response on behalf of AccountingWEB members.