The high costs of acquiring new skills, or of reinforcing existing ones, are a reality for many employees and for their employers. Surprisingly, however, the question of tax relief turns more on the way a course is funded than on the skills being learned.
Take three examples:
1. A qualified medical registrar, employed by an NHS trust, is contractually required to attend specific training courses, to undergo certain appraisals and to take some exams. The total cost is a little over £3,000.
2. An accountant is required, again under the terms of his employment contract, to pay for certain course fees and reference books to enable him to gain a professional qualification. The total cost here exceeds £6,000.
3. A school leaver is taken on by a company to work in its warehouse. It may be necessary for him to use a company van in the future, so the employer pays £2,000 for driving lessons.
Do any or all of these costs qualify for tax relief? An instinctive view may be that the first two are legitimate but that the last would not be allowed. In reality, the first two are based on real cases (respectively Decadt and Perrin) where tax relief was denied, whereas the last may well be allowable based on statutory wording and published HMRC guidance. So what is going on?
The catch lies in what we mean by tax relief. Tax law draws a distinction between an exempt benefit (where there is no tax liability for the employee for a benefit provided by the employer) and a tax deduction (where an employee incurs costs personally and claims to reduce his or her tax bill accordingly). In each of the first two examples above, the costs were borne by the employees themselves. In the last case, it is the employer who is funding the driving lessons. In the context of training costs, the two approaches lead to very different tax results.
Why should this be? For costs borne by individual employees, it all comes down to the notoriously tight rules for employee expenses. These are only allowed for tax purposes if they are incurred “wholly, exclusively and necessarily in the performance of the duties of the employment”. Case law going back many decades shows this to be an extraordinarily tight condition. An employee may gain some personal benefit, or the expenses may not be incurred in the performance of the duties – very few costs incurred by employees meet these stringent tests.
By contrast, there is a statutory exemption for “work-related training” where the costs are borne by the employer – such costs are deductible in calculating the employer’s profits but not taxable on the employee. The rules are widely drawn to encompass “any knowledge, skills or personal qualities” likely to prove useful for work. Conditions apply, but they are not onerous, and a wide variety of training may be provided as a tax-free benefit by the employer.
Practical Tip :
Wherever possible, training costs should be borne by the employer rather than by the employee. If the employer is not willing to fund them, a salary sacrifice arrangement can be implemented, whereby the employee formally gives up an element of salary but has his training costs met instead. If properly implemented, this can be cost-neutral for the employer yet beneficial to the employee.
Ray Chidell
